Heterogeneous Time Preferences and Interest Rates - The Preferred Habitat Theory Revisited
The influence of heterogeneous time preferences on the term structure is investigated. Motivated by the Preferred Habitat Theory of Modigliani and Sutch, a model for intertemporal preferences accounting for preferred habitats is proposed. In a heterogeneous world, preferred habitats can explain humps in the yield curve. Agents with a long habitat prefer long term bonds to shorter instruments as the Preferred Habitat Theory predicts.
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