Consumption-Based Model and the Term Structure of Subjective Time Preference Rates: Empirical Evidence

Abstract

In this article we develop a parsimonious consumption-based model of the term structure of interest rates and test its implications for US monthly data from 1970:4 to 2013:1. Our main objective is to shed a new light on the term structure of subjective time preference rates. The empirical analysis exhibits two distinct trends for two sub-periods: from 1972 to 1990 and from 1991 to 2013. Our results clearly cast doubt on the assumption of a flat term structure as implied by the standard exponential discounting function. The shape of a decreasing term structure is reported.