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Macroeconomic Models and the Yield Curve: An assessment of the Fit

Jagjit Chadha () and Sean Holly ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Many have questioned the empirical relevance of the Calvo-Yun model. This paper appends three widely-studied macroeconomic models (Calvo-Yun, Hybrid and Svensson) with forward rate curves. We back out from observations on the yield curve the underlying macroeconomic model that most closely matches the level, slope and curvature of the yield curve. With each model we trace the response of the yield curve to macroeconomic shocks. We assess the fit of each model with the observed behaviour in forward rates. We find limited support for Calvo-Yun model in terms of fit with the observed yield curve but we find some support for each of the Hybrid and Svensson models. We conclude that macroeconomic persistence seems to be priced into the yield curve.

Keywords: Macromodels; Yield Curve; Persistence (search for similar items in EconPapers)
JEL-codes: E43 E44 E47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-mac
Date: 2006-05
Note: Ec
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Journal Article: Macroeconomic models and the yield curve: An assessment of the fit (2010) Downloads
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