THE TERM STRUCTURE OF INTEREST-RATES IN REAL AND MONETARY ECONOMIES

This paper modifies standard asset pricing models by introducing capital, a variable labor supply, and money. A surprising, but very positive, result is that in a real production economy the interest rate is close to a random walk. This result is found to be true even if there is no persistence in the driving process of the model. In this paper, we generalize the standard cash-in-advance constraint by using a shopping-time technology. This generalization makes it possible to match observed variability for the velocity of money. This type of monetary model, however, is not successful in matching observed behavior of bond prices.