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Category > Management Posted 02 Feb 2018 My Price 8.00

term structure of interest rate

Regime changes and the term structure of interest rates. (See Mankiw and Miron, 1986.) Consider an economy where money is neutral. Specifically, assume that πt = mt and that r is constant at zero. Suppose that the money supply is given by  where ε is a white-noise disturbance.

 

) Assume that the rational-expectations theory of the term structure of interest rates holds (see [11.6]). Specifically, assume that the two-period interest rate is given by  denotes the nominal interest rate from t to t +1; thus, by the Fisher identity, it equals  

 

(i) What is  as a function of mt and k?

 

(iii) What is the relation between   as a function of 

 

(iv) How would a change in k affect the relation between  ? Explain intuitively.

 

(b) Suppose that the two-period rate includes a time-varying term premium:

 

 is a white-noise disturbance that is independent of ε. Consider the OLS regression   et +1.

 

(i) Under the rational-expectations theory of the term structure (with θt = 0 for all t), what value would one expect for b? (Hint: For a univariate OLS regression, the coefficient on the right-hand-side variable equals the covariance between the right-hand-side and left hand-side variables divided by the variance of the right-hand-side variable.)  

 

(ii) Now suppose that θ has variance  What value would one expect for b?

 

(iii) How do changes in k affect your answer to part (ii)? What happens to bas k approaches 1?

 

 

 


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Maurice Tutor
(5)
Status NEW Posted 02 Feb 2018 07:02 PM My Price 8.00

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