Heterogeneous Time Preferences and Interest Rates
The Preferred Habitat Theory Revisited
The influence of heterogeneous time preferences on the term structure is investigated. Motivated by the Preferred Habitat Theory of Modigliani and Sutch, a model for intertemporal preferences accounting for preferred habitats is proposed. In a heterogeneous world, preferred habitats can explain humps in the yield curve. Agents with a long habitat prefer long term bonds to shorter instruments as the Preferred Habitat Theory predicts.
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