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Long-Run Risk And Money Market Rates: An Empirical Assessment

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  • d'Addona, Stefano

Abstract

Using postwar U.S. data, I study the implied interest rates in a simple long-run risk (LRR) model. Empirical estimates show that, as in standard consumption-based models with power utility preferences, the movements of the implied risk-free rate are entirely determined by the variations of expected consumption growth. This leads to a negative relationship between LRR Euler equation rates and money market rates. Nevertheless, when the low-frequency movements of consumption growth are accounted for, the long-run component of consumption growth is a key element to partially capture the countercyclical variations of the money market rates.

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  • d'Addona, Stefano, 2017. "Long-Run Risk And Money Market Rates: An Empirical Assessment," Macroeconomic Dynamics, Cambridge University Press, vol. 21(4), pages 1096-1117, June.
    • Handle: RePEc:cup:macdyn:v:21:y:2017:i:04:p:1096-1117_00
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