The Effect of Risk on Interest Rates: A Synthesis of the Macroeconomic and Financial Views / Pentti J.K. Kouri.

Format:

Book

Author/Creator:

Kouri, Pentti J.K.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0643.

NBER working paper series no. w0643

Language:

English

Subjects (All):

Interest rates.

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

The Effect of Risk on Interest Rates

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1981.

Cambridge : National Bureau of Economic Research, 1981.

Summary:

This paper analyzes the effects of real income and price level uncertainty on equilibrium interest rates. It is demonstrated that even if there are no outside nominal assets, the interest rate on nominal bonds contains a risk premium, or as the case may be, a risk discount. The sign, and the magnitude, of the deviation from the Fisher parity depends on the covariance between the purchasing power of money on the one hand and real income on the other. The second part of the paper extends the model into a model of two countries, two monies and two bonds denominated in these two monies. It is shown, in contrast with statements made in the literature, that the 'efficiency' of international financial markets does not imply equality of expected real interest rates on bonds denominated in different currencies, nor does it imply that the forward exchange rate should be an unbiased predictor of the future spot exchange rate. This is again true even when there are no outside nominal assets in the world economy.

Notes:

Print version record

March 1981.