RECONCILING THE TERM STRUCTURE OF INTEREST-RATES WITH THE CONSUMPTION-BASED ICAP MODEL

This paper attempts to explain some of the time series features of the low end of the term structure of US interest rates using a representa tive-agent cash-in-advance consumption-based ICAP model, modified to a llow for time variation in the conditional variances of the exogenous processes. The ability of the model to reproduce features of the actua l data is evaluated using a Monte Carlo simulation technique. The stat istical properties of simulated yields and spreads are shown to replic ate several properties of the observed term structure of U.S. T-bills over the sample 1964-1988.