We show how to construct models of the term structure of interest rates in which the expectations hypothesis holds. McCulloch (1993) presents such a model, thereby contradicting an assertion by Cox, Ingersoll, and Ross (1981), but his example is Gaussian and falls outside the class of...

We analyze consumption and asset pricing with recursive preferences given by Kreps--Porteus stochastic differential utility (K--P SDU). We show that utility depends on two state variables: current consumption and a second variable (related to the wealth--consumption ratio) that captures all...

We show how to construct arbitrage-free models of the yield curve in which the expectations hypothesis holds. We generalize a previous example of McCulloch's in three ways: (i) by characterizing the hypotheses in terms of forward rates; (ii) by showing how to construct examples of a whole class...

With a stochastic general equilibrium model, we highlight the role of both monetary policy and banks in determining the relationship between the federal funds rate and bank reserves. Monetary policy consists of a stochastic upward-sloping supply schedule for reserves, along with a discount...

This paper studies recent models of the liquidity effect of money on interest rates to determine if a systematic relationship between liquidity shocks and the economy could affect the average real interest rate.