English, Article, Journal or magazine article edition: A joint econometric model of macroeconomic and term structure dynamics Peter Hoerdahl; Peter Hördahl; Oreste Tristani; ...

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Bookmark: http://trove.nla.gov.au/version/34365
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • A joint econometric model of macroeconomic and term structure dynamics
Author
  • Peter Hoerdahl
  • Peter Hördahl
  • Oreste Tristani
  • David Vestin
Physical Description
  • preprint
Notes
  • RePEc:mmf:mmfc03:48
  • We construct and estimate a joint model of macroeconomic and yield curve dynamics. A small-scale backward/​forward-looking rational expectations model describes the macroeconomy. Bond yields are affine functions of the state variables of the macromodel, and are derived assuming absence of arbitrage opportunities and a flexible price of risk specification. While maintaining the tractability of the affine set-up, our approach provides a way to interpret yield dynamics in terms of macroeconomic fundamentals; time-varying risk premia, in particular, are associated with the fundamental sources of risk in the economy. In an application to German data, the model is able to capture the salient features of the term structure of interest rates and its forecasting performance matches that of the best available models based on latent factors. The model has also considerable success in accounting for the empirical failure of the expectations hypothesis.
  • RePEc:ecm:nasm04:379
  • We construct and estimate a joint model of macroeconomic and yield curve dynamics. A small-scale rational expectations model describes the macroeconomy. Bond yields are affine functions of the state variables of the macromodel, and are derived assuming absence of arbitrage opportunities and a flexible price of risk specification. While maintaining the tractability of the affine set-up, our approach provides a way to interpret yield dynamics in terms of macroeconomic fundamentals; time-varying risk premia, in particular, are associated with the fundamental sources of risk in the economy. In an application to German data, the model is able to capture the salient features of the term structure of interest rates and its forecasting performance is often superior to that of the best available models based on latent factors. The model has also considerable success in accounting for features of the data that represent a puzzle for the expectations hypothesis.
  • Affine term-structure models; policy rules; new neo-classical synthesis.
  • RePEc:ecb:ecbwps:20040405
Language
  • English
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