The Term Structure of Interest Rates in an Equilibrium Economy with Short Term and Long Term Investments

50 Pages Posted: 21 Mar 2011

See all articles by Carles Vergara-Alert

Carles Vergara-Alert

University of Navarra - IESE Business School

Multiple version iconThere are 3 versions of this paper

Date Written: March 14, 2011

Abstract

This paper develops a general equilibrium model to study the link between real investments and the term structure of interest rates. In the model, agents’ decisions on consumption and investments with short and long term horizons determine the dynamics of the term structure in equilibrium. I find closed-form solutions for consumption and the term structure as a function of the aggregated ratio of capital invested in long term to short term investments. The model and its calibration to U.S. data shows the importance of this ratio in capturing the dynamics of consumption and the term structure of interest rates.

Keywords: Term structure, Long term investments, Consumption, Affine models

JEL Classification: E43, G12, C68

Suggested Citation

Vergara-Alert, Carles, The Term Structure of Interest Rates in an Equilibrium Economy with Short Term and Long Term Investments (March 14, 2011). Available at SSRN: https://ssrn.com/abstract=1787966 or http://dx.doi.org/10.2139/ssrn.1787966

Carles Vergara-Alert (Contact Author)

University of Navarra - IESE Business School ( email )

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HOME PAGE: http://web.iese.edu/cvergara/

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