Claus Munk
- Published in print:
- 2011
- Published Online:
- September 2011
- ISBN:
- 9780199575084
- eISBN:
- 9780191728648
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199575084.003.0005
- Subject:
- Economics and Finance, Financial Economics
The issuer of a bond is borrowing money from the holder of the bond and promises to pay back the loan according to a predefined payment scheme. An individual who has a clear preference for current ...
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The issuer of a bond is borrowing money from the holder of the bond and promises to pay back the loan according to a predefined payment scheme. An individual who has a clear preference for current capital to finance investments or current consumption can borrow by issuing a bond to an individual who has a clear preference for future consumption opportunities. The price of a bond of a given maturity is, of course, set to align the demand and supply of that bond, and will consequently depend on the attractiveness of the real investment opportunities and on the individuals' preferences for consumption over the maturity of the bond. The term ‘structure of interest rates’ will reflect these dependencies. This chapter derives relations between equilibrium interest rates and aggregate consumption and production in settings with a representative agent. Examples of equilibrium term structure models that are derived from the basic relations between interest rates, consumption, and production are given. The relation between real and nominal yields is discussed. Finally, some traditional hypotheses about the shape of the term structure are critically reviewed.Less
The issuer of a bond is borrowing money from the holder of the bond and promises to pay back the loan according to a predefined payment scheme. An individual who has a clear preference for current capital to finance investments or current consumption can borrow by issuing a bond to an individual who has a clear preference for future consumption opportunities. The price of a bond of a given maturity is, of course, set to align the demand and supply of that bond, and will consequently depend on the attractiveness of the real investment opportunities and on the individuals' preferences for consumption over the maturity of the bond. The term ‘structure of interest rates’ will reflect these dependencies. This chapter derives relations between equilibrium interest rates and aggregate consumption and production in settings with a representative agent. Examples of equilibrium term structure models that are derived from the basic relations between interest rates, consumption, and production are given. The relation between real and nominal yields is discussed. Finally, some traditional hypotheses about the shape of the term structure are critically reviewed.
Eric Barthalon
- Published in print:
- 2014
- Published Online:
- November 2015
- ISBN:
- 9780231166287
- eISBN:
- 9780231538305
- Item type:
- chapter
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231166287.003.0008
- Subject:
- Economics and Finance, Behavioural Economics
This chapter extends the field of application of the theory of psychological time and memory decay to nominal interest rates by looking at their correlation with the perceived rate of nominal growth ...
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This chapter extends the field of application of the theory of psychological time and memory decay to nominal interest rates by looking at their correlation with the perceived rate of nominal growth in eighteen countries. It begins with an overview of the theory of the psychological rate of interest, paying special attention to the psychological symmetry between memory decay and future discounting. It then considers whether the psychological rate of interest computed from the sequence of quarterly nominal GDP growth rates is compatible with U.S. AAA corporate bond yields since 1951. It also presents empirical observations about nominal interest rates and the perceived rate of nominal growth and proceeds to discuss nominal interest rates at the end of the German hyperinflation as well as the application of the theory of the psychological rate of interest to the yield on British Consols during the nineteenth century. It concludes that Maurice Allais's theory of the psychological rate of interest is not compatible with a broader set of empirical data.Less
This chapter extends the field of application of the theory of psychological time and memory decay to nominal interest rates by looking at their correlation with the perceived rate of nominal growth in eighteen countries. It begins with an overview of the theory of the psychological rate of interest, paying special attention to the psychological symmetry between memory decay and future discounting. It then considers whether the psychological rate of interest computed from the sequence of quarterly nominal GDP growth rates is compatible with U.S. AAA corporate bond yields since 1951. It also presents empirical observations about nominal interest rates and the perceived rate of nominal growth and proceeds to discuss nominal interest rates at the end of the German hyperinflation as well as the application of the theory of the psychological rate of interest to the yield on British Consols during the nineteenth century. It concludes that Maurice Allais's theory of the psychological rate of interest is not compatible with a broader set of empirical data.
Claus Munk
- Published in print:
- 2013
- Published Online:
- May 2013
- ISBN:
- 9780199585496
- eISBN:
- 9780191751790
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199585496.003.0011
- Subject:
- Economics and Finance, Econometrics
This chapter focuses on the consequences of general asset pricing theory for the pricing of bonds and for the term structure of interest rates implied by bond prices. After a short introduction to ...
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This chapter focuses on the consequences of general asset pricing theory for the pricing of bonds and for the term structure of interest rates implied by bond prices. After a short introduction to the notation and the bond market terminology, relations are derived between equilibrium interest rates and aggregate consumption and production in settings with a representative individual. The famous Vasicek and Cox-Ingersoll-Ross models are shown to follow as special cases. The implications of these models for the term structure of interest rates are explored. The relation between real and nominal interest rates and yield curves is investigated, both in a general setting and in specific models. Finally, the traditional expectation hypothesis is critically reviewed.Less
This chapter focuses on the consequences of general asset pricing theory for the pricing of bonds and for the term structure of interest rates implied by bond prices. After a short introduction to the notation and the bond market terminology, relations are derived between equilibrium interest rates and aggregate consumption and production in settings with a representative individual. The famous Vasicek and Cox-Ingersoll-Ross models are shown to follow as special cases. The implications of these models for the term structure of interest rates are explored. The relation between real and nominal interest rates and yield curves is investigated, both in a general setting and in specific models. Finally, the traditional expectation hypothesis is critically reviewed.
Leonardo Auernheimer
- Published in print:
- 2008
- Published Online:
- August 2013
- ISBN:
- 9780262182669
- eISBN:
- 9780262282284
- Item type:
- chapter
- Publisher:
- The MIT Press
- DOI:
- 10.7551/mitpress/9780262182669.003.0004
- Subject:
- Economics and Finance, Econometrics
This chapter presents a simple continuous-time model with microeconomic foundations and uses it to analyze some of the questions related to the fiscal theory of the price level (FTPL) and to a policy ...
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This chapter presents a simple continuous-time model with microeconomic foundations and uses it to analyze some of the questions related to the fiscal theory of the price level (FTPL) and to a policy of pegging the nominal interest rate. The chapter is organized as follows. Section 1 presents the model and elaborates on some basic points to be addressed. Section 2 considers the case of a “monetary rule,” in which the government sets the path of the money supply, and Section 3 compares the model’s conclusions to some of the propositions in the literature. Section 4 discusses the case of a central bank pegging the nominal interest rate, and Section 5 concludes. It is shown that the hyperinflationary solution as an alternative rational expectations path does not exist (in the context of an exogenous monetary rule) for the general case of a positive rate of monetary expansion. Indeed, there is no reason for the usual statement that such a path is the FTPL alternative to the monetary explanation resulting in a steady-state, noninflationary path of prices and real variables.Less
This chapter presents a simple continuous-time model with microeconomic foundations and uses it to analyze some of the questions related to the fiscal theory of the price level (FTPL) and to a policy of pegging the nominal interest rate. The chapter is organized as follows. Section 1 presents the model and elaborates on some basic points to be addressed. Section 2 considers the case of a “monetary rule,” in which the government sets the path of the money supply, and Section 3 compares the model’s conclusions to some of the propositions in the literature. Section 4 discusses the case of a central bank pegging the nominal interest rate, and Section 5 concludes. It is shown that the hyperinflationary solution as an alternative rational expectations path does not exist (in the context of an exogenous monetary rule) for the general case of a positive rate of monetary expansion. Indeed, there is no reason for the usual statement that such a path is the FTPL alternative to the monetary explanation resulting in a steady-state, noninflationary path of prices and real variables.
Eric Barthalon
- Published in print:
- 2014
- Published Online:
- November 2015
- ISBN:
- 9780231166287
- eISBN:
- 9780231538305
- Item type:
- book
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231166287.001.0001
- Subject:
- Economics and Finance, Behavioural Economics
This book applies the neglected theory of psychological time and memory decay of Nobel Prize–winning economist Maurice Allais (1911–2010) to model investors' psychology in the present context of ...
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This book applies the neglected theory of psychological time and memory decay of Nobel Prize–winning economist Maurice Allais (1911–2010) to model investors' psychology in the present context of recurrent financial crises. Shaped by the behavior of the demand for money during episodes of hyperinflation, Allais's theory suggests economic agents perceive the flow of clocks' time and forget the past at a context-dependent pace: rapidly in the presence of persistent and accelerating inflation and slowly in the event of the opposite situation. The book recasts Allais's work as a general theory of “expectations” under uncertainty, narrowing the gap between economic theory and investors' behavior. The text extends Allais's theory to the field of financial instability, demonstrating its relevance to nominal interest rates in a variety of empirical scenarios and the positive nonlinear feedback that exists between asset price inflation and the demand for risky assets. Reviewing the works of the leading protagonists in the expectations controversy, this volume exposes the limitations of adaptive and rational expectations models and, by means of the perceived risk of loss, calls attention to the speculative bubbles that lacked the positive displacement discussed in Charles P. Kindleberger's model of financial crises. It ultimately extrapolates Allaisian theory into a pragmatic approach to investor behavior and the natural instability of financial markets. It concludes with the policy implications for governments and regulators.Less
This book applies the neglected theory of psychological time and memory decay of Nobel Prize–winning economist Maurice Allais (1911–2010) to model investors' psychology in the present context of recurrent financial crises. Shaped by the behavior of the demand for money during episodes of hyperinflation, Allais's theory suggests economic agents perceive the flow of clocks' time and forget the past at a context-dependent pace: rapidly in the presence of persistent and accelerating inflation and slowly in the event of the opposite situation. The book recasts Allais's work as a general theory of “expectations” under uncertainty, narrowing the gap between economic theory and investors' behavior. The text extends Allais's theory to the field of financial instability, demonstrating its relevance to nominal interest rates in a variety of empirical scenarios and the positive nonlinear feedback that exists between asset price inflation and the demand for risky assets. Reviewing the works of the leading protagonists in the expectations controversy, this volume exposes the limitations of adaptive and rational expectations models and, by means of the perceived risk of loss, calls attention to the speculative bubbles that lacked the positive displacement discussed in Charles P. Kindleberger's model of financial crises. It ultimately extrapolates Allaisian theory into a pragmatic approach to investor behavior and the natural instability of financial markets. It concludes with the policy implications for governments and regulators.
Peter Conti-Brown
- Published in print:
- 2018
- Published Online:
- October 2018
- ISBN:
- 9780198827443
- eISBN:
- 9780191866296
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/oso/9780198827443.003.0002
- Subject:
- Business and Management, Pensions and Pension Management
Until recently, it was widely believed that central banks must protect people from their own worst instincts: the populace demands easy money and low interest rates, and a politically sensitive ...
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Until recently, it was widely believed that central banks must protect people from their own worst instincts: the populace demands easy money and low interest rates, and a politically sensitive representative class will give it to them. Central banks have the responsibility of resolving this time inconsistency problem by protecting the long-term value of the currency even against the short term demands of politics. Yet the financial crisis of 2008 and the 2016 election have changed this narrative. This chapter explores how this new political economy of central banking, in the face of long-term low interest rates, changes the posture of central banks against the rest of the polity. It discusses some history of political pressures against central banks in other climates and makes predictions about how the ‘new normal’ of lower interest rates will challenge the Fed’s ability to stay above the political fray, despite its best intentions.Less
Until recently, it was widely believed that central banks must protect people from their own worst instincts: the populace demands easy money and low interest rates, and a politically sensitive representative class will give it to them. Central banks have the responsibility of resolving this time inconsistency problem by protecting the long-term value of the currency even against the short term demands of politics. Yet the financial crisis of 2008 and the 2016 election have changed this narrative. This chapter explores how this new political economy of central banking, in the face of long-term low interest rates, changes the posture of central banks against the rest of the polity. It discusses some history of political pressures against central banks in other climates and makes predictions about how the ‘new normal’ of lower interest rates will challenge the Fed’s ability to stay above the political fray, despite its best intentions.
Stefan Homburg
- Published in print:
- 2017
- Published Online:
- August 2017
- ISBN:
- 9780198807537
- eISBN:
- 9780191845451
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/oso/9780198807537.003.0002
- Subject:
- Economics and Finance, Macro- and Monetary Economics
Chapter 2 sets out the basic framework. It considers an economy evolving indefinitely in discrete time, with producers, consumers, and a central bank as principal actors. Individuals plan over finite ...
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Chapter 2 sets out the basic framework. It considers an economy evolving indefinitely in discrete time, with producers, consumers, and a central bank as principal actors. Individuals plan over finite horizons and form expectations according to what they see. Money is conceived of as a commodity that is produced through credit creation rather than distributed by a fancy helicopter. This natural way to represent money is rarely followed in the literature and differs sharply from the usual helicopter drops because it ties money creation to credit creation. The chapter’s upshot is a system of simultaneous equations determining prices, wages, and the nominal interest rate. Using this solution, individuals revise their expectations, and the economy proceeds to the next period. The chapter concludes with functional and numerical specifications for later simulations, the purpose of which is to analyze key economic processes and to derive meaningful results.Less
Chapter 2 sets out the basic framework. It considers an economy evolving indefinitely in discrete time, with producers, consumers, and a central bank as principal actors. Individuals plan over finite horizons and form expectations according to what they see. Money is conceived of as a commodity that is produced through credit creation rather than distributed by a fancy helicopter. This natural way to represent money is rarely followed in the literature and differs sharply from the usual helicopter drops because it ties money creation to credit creation. The chapter’s upshot is a system of simultaneous equations determining prices, wages, and the nominal interest rate. Using this solution, individuals revise their expectations, and the economy proceeds to the next period. The chapter concludes with functional and numerical specifications for later simulations, the purpose of which is to analyze key economic processes and to derive meaningful results.