It has been argued recently by Friedman that the whole term structure of interest rates rather than any single rate represents the relevant opportunity cost of holding money. The purpose of this paper is to present a way to incorporate the term structure in the demand-for-money function compactly with a few parameters and offer empirical evidence for the United States over the period 1960-76 supporting the validity of such an approach. Furthermore, we establish that this function appeared to be stable during a period (1972-74) when standard functions using only one interest rate display significant shifts in parameters.

This study demonstrates a tractable method for analyzing schooling investment with risky incomes. Constant relative risk aversion is assumed, and borrowing in a rudimentary capital market is allowed. A linear, variance-components model on log (real income) is estimated. Only unexplained variation is treated as a source of risk. Illustrative empirical results indicate that students should take either 4 years of college or none at all, depending on time preference, loan availability, and degree of risk aversion. Estimate risk-adjusted rates of return to college exceed 10 percent for some parameter values. Risk adjustments for college rates are small but positive.

It has been argued recently by Friedman that the whole term structure of interest rates rather than any single rate represents the relevant opportunity cost of holding money. The purpose of this paper is to present a way to incorporate the term structure in the demand-for-money function compactly with a few parameters and offer empirical evidence for the United States over the period 1960-76 supporting the validity of such an approach. Furthermore, we establish that this function appeared to be stable during a period (1972-74) when standard functions using only one interest rate display significant shifts in parameters.

This study demonstrates a tractable method for analyzing schooling investment with risky incomes. Constant relative risk aversion is assumed, and borrowing in a rudimentary capital market is allowed. A linear, variance-components model on log (real income) is estimated. Only unexplained variation is treated as a source of risk. Illustrative empirical results indicate that students should take either 4 years of college or none at all, depending on time preference, loan availability, and degree of risk aversion. Estimate risk-adjusted rates of return to college exceed 10 percent for some parameter values. Risk adjustments for college rates are small but positive.