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    Nominal term spread, real rate and consumption growth

    Cieslak, A. and Povala, Pavol (2013) Nominal term spread, real rate and consumption growth. Working Paper. Social Science Electronic Publishing, Rochester, New York, USA.

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    Abstract

    We show the negative of the nominal term spread closely tracks the ex-ante real rate. Connecting this result to the well-documented predictability of output and consumption growth by the term spread, we argue that the estimates of the elasticity of intertemporal substitution (EIS) obtained from the aggregate Euler equation are biased in that they imply a negative EIS. This fact provides one explanation for why it is difficult to link empirically the behavior of asset prices to macro aggregates in the standard representative-agent asset pricing and macro models. We show that a general equilibrium model with heterogeneous agents and limited market participation can account for the change in sign of the relationship between the real rate and consumption or output growth.

    Metadata

    Item Type: Monograph (Working Paper)
    Keyword(s) / Subject(s): real interest rate, term structure of interest rates, Euler equation
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centre: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Sarah Hall
    Date Deposited: 15 Apr 2014 10:25
    Last Modified: 06 Dec 2016 14:50
    URI: http://eprints.bbk.ac.uk/id/eprint/9597

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