Interest Rates and the Durability of Consumption Goods

Download or read book Interest Rates and the Durability of Consumption Goods written by Harry Mamaysky and published by . This book was released on 2002 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this article I study an economy with irreversible durable investment and investors who consume a durable and a nondurable good. In a general equilibrium setting, these assumptions lead to endogenous variation in the implied risk aversion of investors and in the term structure of interest rates. In the model, the magnitude of the intertemporal elasticity of substitution places certain restrictions on the joint dynamical behavior of durable consumption, nondurable consumption, and the yield curve. Tests of the model using postwar U.S. data are supportive of these restrictions. However, while the model is able to generate a relatively large term spread, the level and the variation of the resultant short rate are not empirically plausible. An approximate closed form solution of the model is derived.