VOLUME III
WINTER 1995

CONSUMPTION AND THE TERM STRUCTURE OF INTEREST RATES
 
JORGE V. PÉREZ RODRÍGUEZ
Universidad de Barcelona
 
This article studies whether the growth rates of private and public consump-tion affect the term structure of interest rates in Spain. The paper develops a consumption-based capital asset pricing model (CCAPM) derived from the Sargent (1987) and Lee (1989) models. We consider that a representative agent in a pure exchange economy with rational expectations and symmetric information purchases two goods and discount pure bonds, also having a uti-lity function which is non-separable between private consumption and public expenditure (Bean (1986)). The model is a test of rational expectations, non-separable preferences for public and private consumption and risk aversion as related to the term structure of interest rates. The paper studies the model using quarterly data for consumption (public and private) and real returns for the 1987-1995 period in Spain. This model is accepted on the basis of the test of overidentification constraints of the GMM. The characteristic exponent of the public expenditure growth rate in the substitution marginal rate is signifi-cative. The rational expectations and risk aversion of the agents are also fea-tures of the term structure of interest rates in Spain.
 
Keywords: consumption, interest rates, expectations.

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