Modeling the term structure of interest rates under non-separable utility and durability of goods

The term structure relations implied by a model in which preferences are non-separable functions of the service flows from two goods are investigated. The parameters characterizing preferences are estimated and restrictions on the co-movements of consumptions and Treasury bill returns are examined. Both the durability of goods and the non-separability of preferences are important factors in explaining the time paths of individual returns, but there is substantial evidence against the cross-sectional restrictions implied by our model. Differences between sample mean returns are too large relative to the sample covariances of the return differences and the marginal utility of consumption.