Working Paper: NBER ID: w1415
Authors: Kenneth B. Dunn; Kenneth J. Singleton
Abstract: This paper investigates the term structure relations implied by a two-good model in which goods are durable and the preference function of consimters may be non separable both over time and the decision variables. The parameters characterizing preferences are estimated and the implied restrictions on the comovements of consumptions and the returns from following different investment strategies in bonds are examined. Both the durability of goods (modeled by a linear service technology) and the nonseparability of preferences over services from goods are important factors in explaining the time paths of individual returns. However, substantial evidence against our model is obtained when the restrictions associated with two different investment strategies are studied simultaneously. Specifically, the difference between the sample mean returns are too large relative to the difference between the sample covariances of the returns and the marginal utility from acquiring a unit of the numeraire good. Our findings suggest that these discrepancies are not a consequence of either the relatively small variability in aggregate acquisitions of goods, or our small estimates of relative risk aversion.
Keywords: term structure; interest rates; durability of goods; nonseparable utility
JEL Codes: E43; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonseparability of preferences (D10) | shifts in the term structure (E43) |
| shifts in the term structure (E43) | demands for consumption goods (D12) |
| durability of goods (L68) | time paths of individual returns (C41) |
| consumer preferences (D11) | consumption choices (D10) |
| current prices of goods (P22) | consumption choices (D10) |
| rates at which current consumption can be exchanged for future consumption (D15) | consumption choices (D10) |
| marginal utility of wealth (D11) | returns on different investment strategies (G11) |
| conditional covariances between consumption and returns (E21) | vary over time (C22) |