Nominal Term Spread, Real Rate and Consumption Growth

65 Pages Posted: 4 Jan 2013 Last revised: 13 Feb 2015

See all articles by Anna Cieslak

Anna Cieslak

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Pavol Povala

Norges Bank Investment Management

Date Written: December 1, 2014


Robust empirical evidence suggests that a steep slope of the nominal yield curve predicts an increase in the future real activity. We show that the negative of the slope closely traces the variation in the ex-ante real rate. We then argue that the predictive content of the slope for real activity empirically encapsulates the intertemporal tradeoff that arises in a broad class of equilibrium models. As a key implication, the estimates of the elasticity of intertemporal substitution (EIS) from the aggregate Euler equation are severely downwardly biased, implying a negative aggregate EIS. A model with heterogeneous agents and limited market participation can reconcile the positive EIS found in micro data with the negative relationship between the ex-ante real rate and aggregate consumption and output.

Keywords: Real interest rate, term structure of interest rates, Euler equation, elasticity of intertemporal substitution

JEL Classification: E12, E21, E43, G12

Suggested Citation

Cieslak, Anna and Povala, Pavol, Nominal Term Spread, Real Rate and Consumption Growth (December 1, 2014). Available at SSRN: or

Anna Cieslak

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919 660 7879 (Phone)


National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pavol Povala (Contact Author)

Norges Bank Investment Management ( email )

3 Old Burlington Street
Queensberry House
London, W1S3AE
United Kingdom


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