New-Keynesian Macroeconomics and the Term Structure
This article complements the structural New-Keynesian macro framework with a no-arbitrage term structure model. Whereas our methodology is general, we focus on an extended macro-model with an unobservable time-varying markup and stochastic risk aversion. Term structure information helps to identify the dynamics of the observed and unobserved variables and the structural parameters. Moreover, the model yields a tractable linear system estimable by maximum likelihood or GMM. Whereas the VAR representation is simple when including term structure information, the reduced-form model for the observed macro variables is more complex. Relative to the term structure literature, we create an ane term structure model where all factors have an economic meaning and obey New-Keynesian structural relations. Our estimates yield a large Phillips curve parameter and a sensible curvature parameter for the utility function, making monetary policy quite effective. In the term structure, observable macro factors explain more of the variation of long yields compared with short yields. The unobservable factors contribute mostly to the dynamics of the slope and curvature factors in the term structure
Bond pricing, Monetary Policy, Expectations Hypothesis, Structural Parameters
This article complements the structural New-Keynesian macro framework with a no-arbitrage affine term structure model. Whereas our methodology is general, we focus on an extended macro-model with an unobservable time-varying inflation target and the natural rate of output which are filtered from macro and term structure data. We obtain large and significant estimates of the Phillips curve and real interest rate response parameters. Our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks. The inflation target dominates the variation in the "level factor" whereas the monetary policy shocks dominate the variation in the "slope and curvature factors".
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