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Interest Rates and the Durability of Consumption Goods

Harry Mamaysky


September 2001

AFA 2002 Atlanta Meetings; Yale ICF Working Paper No. 00-52

In this article I study an economy with irreversible durable investment and investors who consume a durable and a nondurable good. In a general equilibrium setting, these assumptions lead to endogenous variation in the implied risk aversion of investors and in the term structure of interest rates. In the model, the magnitude of the intertemporal elasticity of substitution places certain restrictions on the joint dynamical behavior of durable consumption, nondurable consumption, and the yield curve. Tests of the model using postwar U.S. data are supportive of these restrictions. However, while the model is able to generate a relatively large term spread, the level and the variation of the resultant short rate are not empirically plausible. An approximate closed form solution of the model is derived.

Number of Pages in PDF File: 53

JEL Classification: G1, D5, E2

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Date posted: September 19, 2001  

Suggested Citation

Mamaysky, Harry, Interest Rates and the Durability of Consumption Goods (September 2001). AFA 2002 Atlanta Meetings; Yale ICF Working Paper No. 00-52. Available at SSRN: http://ssrn.com/abstract=283428 or http://dx.doi.org/10.2139/ssrn.283428

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Harry Mamaysky (Contact Author)
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