On the term structure of interest rates

John B. Donaldson, Thore Johnsen, Rajnish Mehra

Research output: Contribution to journalArticle

23 Scopus citations

Abstract

This paper tests the one good stochastic growth model with respect to its ability to explain the term structure of real interest rates. We undertake both a qualitative and quantitative analysis. First we assess the changing shape of the yield curve over the model economy's 'business cycle' and compare our results with what is empirically observed. Second, we employ the model to study various implications of informational and allocative efficiency, properties which the artificial economy must possess. It is found, for example, that long-term rates are less volatile than short-term rates and that holding premia can be highly correlated over time. Third, we study the time-varying risk premium implicit in the economy's forward rate structure. A purely quantitative assessment of the model's explanatory power is also provided.

Original languageEnglish (US)
Pages (from-to)571-596
Number of pages26
JournalJournal of Economic Dynamics and Control
Volume14
Issue number3-4
DOIs
StatePublished - 1990
Externally publishedYes

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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