This paper proposes a continuous-time term-structure model under stochastic differential utility
with non-unitary elasticity of intertemporal substitution (EIS, henceforth) in a representative-agent
endowment economy with mean-reverting expectations on real output growth and inflation. Using this
model, we make clear structural relationships among a term structure of real and nominal interest rates,
utility form and underlying economic factors (in particular, inflation expectation). Notably, we show
that, if (1) the EIS is less than one, (2) the agent is comparatively more risk-averse relative to timeseparable
utility, (3) short-term interest rates are pro-cyclical, and (4) the rate of expected inflation is
negatively correlated with the rate of real output growth and its expected rate, then a nominal yield
curve can have a low instantaneous riskless rate and an upward slope.
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