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Uncertainty, Expectations, and Financial InstabilityReviving Allais's Lost Theory of Psychological Time$
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Eric Barthalon

Print publication date: 2014

Print ISBN-13: 9780231166287

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231166287.001.0001

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The HRL Formulation and Nominal Interest Rates

The HRL Formulation and Nominal Interest Rates

Chapter:
(p.153) Chapter Eight The HRL Formulation and Nominal Interest Rates
Source:
Uncertainty, Expectations, and Financial Instability
Author(s):

Eric Barthalon

Publisher:
Columbia University Press
DOI:10.7312/columbia/9780231166287.003.0008

This chapter extends the field of application of the theory of psychological time and memory decay to nominal interest rates by looking at their correlation with the perceived rate of nominal growth in eighteen countries. It begins with an overview of the theory of the psychological rate of interest, paying special attention to the psychological symmetry between memory decay and future discounting. It then considers whether the psychological rate of interest computed from the sequence of quarterly nominal GDP growth rates is compatible with U.S. AAA corporate bond yields since 1951. It also presents empirical observations about nominal interest rates and the perceived rate of nominal growth and proceeds to discuss nominal interest rates at the end of the German hyperinflation as well as the application of the theory of the psychological rate of interest to the yield on British Consols during the nineteenth century. It concludes that Maurice Allais's theory of the psychological rate of interest is not compatible with a broader set of empirical data.

Keywords:   psychological time, memory decay, nominal interest rates, psychological rate of interest, discounting, nominal growth, hyperinflation, British Consols, Maurice Allais, empirical data

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