Nakamura, Hisashi

Nozawa, Wataru

Takahashi, Akihiko

Kyoto University Research Information Repository

TitleMacroeconomic Implications of Term Structures of InterestRates under Stochastic Differential Utility with Non-UnitaryEIS (Mathematical Economics)Author(s)Nakamura, Hisashi; Nozawa, Wataru; Takahashi, AkihikoCitation数理解析研究所講究録 (2009), 1654: 100-100Issue Date2009-06URL http://hdl.handle.net/2433/140841RightType Departmental Bulletin PaperTextversionpublisherKyoto UniversityMacroeconomic Implications of Term Structures of Interest Ratesunder Stochastic Differential Utility with Non-Unitary EISHisashi Nakamura, Wataru Nozawa, and Akihiko Takahashi*University of Tokyo, Graduate School of Economics7-3-1 Hongo, Bunkyo-ku, Tokyo 113-0033, Japan.February 22, 2009AbstractAbstract: This paper proposes a continuous-time term-structure model under stochas-tic differential utility with non-unitary elasticity of intertemporal substitution (EIS,henceforth) in a representative-agent endowment economy with mean-reverting ex-pectations on real output growth and inflation. Using this model, we make clearstructural relationships among a term structure of real and nominal interest rates,utility form and underlying economic factors (in particular, inflation expectation).Notably, we show that, if (1) the EIS is less than one, (2) the agent is compar-atively more risk-averse relative to time-separable utility, (3) short-term interestrates are pro-cyclical, and (4) the rate of expected inflation is negatively correlatedwith the rate of real output growth and its expected rate, then a nominal yieldcurve can have a low instantaneous riskless rate and an upward slope. Keywords:Stochastic differential utility; Non-unitary EIS; Term structure of interest rates;Inflation expectation. JEL codes: E43, G12.’Corresponding author: Hisashi Nakamura (email: nakamura@e.u-tokyo.ac.jp). We all thank to Zengjing Chen, Lars PeterHansen, Hyeng Keun Koo, Shigeo Kusuoka, Chenghu Ma, Jun Sekine and Jaeyoung Sung for their valuable comments. Also, weare thankful to all participants at the Seoul-Tokyo Conference 2008 in Mathematical Finance at KIAS in Seoul, the “Finance,Stochastics and Asymptotic Analysis” seminar at Osaka University, and the 2008 Mathematical Economics Conference at theResearch Institute for Mathematical Sciences, Kyoto University.1654 2009 p.100 100

Macroeconomic Implications of Term Structures of Interest Rates under Stochastic Differential Utility with Non-Unitary EIS (Mathematical Economics)

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Macroeconomic Implications of Term Structures of Interest Rates under Stochastic Differential Utility with Non-Unitary EIS (Mathematical Economics)

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