Stochastic trends in consumption and the term structure of interest rates

This paper analyzes the sign of expected term premiums on real bonds in a representative agent model of general equilibrium for two decompositions of the log endowment process into permanent and transitory components. In the limit, as the maturity of a bond increases, the premium is positive for the decomposition in which the permanent and transitory components are uncorrelated and is positive (negative) for the Beveridge-Nelson decomposition in which they are perfectly correlated when an endowment innovation changes the permanent component by less (more) than the innovation itself.