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LONG-RUN RISK AND MONEY MARKET RATES: AN EMPIRICAL ASSESSMENT

  • Stefano d'Addona (a1)

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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Corresponding author

Address correspondence to: Stefano d'Addona, Department of Political Science, University of Rome Tre, Via G. Chiabrera, 199, I-00145 Rome, Italy; e-mail: daddona@uniroma3.it.

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I thank seminar participants at the University of California, Riverside, and at the 2014 Conference of the International Association for Applied Econometrics for helpful discussions. I am grateful to William A. Barnett (the Editor) and two anonymous referees for their comments and suggestions. An earlier version of this paper was circulated under the title “Money market implications of long run risk models”; I thank Ilaria Musumeci for her support in drafting the previous version of this work.

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References

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LONG-RUN RISK AND MONEY MARKET RATES: AN EMPIRICAL ASSESSMENT

  • Stefano d'Addona (a1)

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