Decreasing Yield Curves in a Model with an Unknown Constant Growth Rate

Posted: 3 May 2001

See all articles by Frank Riedel

Frank Riedel

Bielefeld University - Center for Mathematical Economics

Abstract

The effect of incomplete information on the term structure of interest rates is examined in the framework of a pure exchange economy under uncertainty where aggregate output grows at a constant rate. If the growth rate is known, the term structure is flat. In contrast, the term structure is a decreasing curve when agents do not know the growth rate. Long term yields are less than the short rate and the yield of long term bonds is determined by the worst possible realizations of future short rates.

Keywords: Incomplete information, term structure of interest rates

JEL Classification: D5, D9, E4, G1

Suggested Citation

Riedel, Frank, Decreasing Yield Curves in a Model with an Unknown Constant Growth Rate. Available at SSRN: https://ssrn.com/abstract=264298

Frank Riedel (Contact Author)

Bielefeld University - Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

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