A Macroeconomic Foundation for the Equilibrium Term Structure of Interest Rates
37 Pages Posted: 25 Apr 2013
Date Written: April 25, 2013
This paper explores the term structure of interest rates implied by a stochastic endogenous growth model with imperfect price adjustment. The production and price-setting decisions of firms drive low-frequency movements in growth and inflation rates that are negatively related. With recursive preferences, these growth and inflation dynamics are crucial for rationalizing key stylized facts in bond markets. When calibrated to macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields and the failure of the expectations hypothesis.
Keywords: term structure of interest rates, asset pricing, recursive preferences, monetary policy, endogenous growth, inflation, productivity
JEL Classification: E43, E44, G12, G18
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