Evolving macroeconomic perceptions and the term structure of interest rates

Athanasios Orphanides and Min Wei

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 2, 239-254

Abstract: We explore the role of evolving beliefs regarding the structure of the macroeconomy in improving our understanding of the term structure of interest rates within the context of a simple macro-finance model. Using quarterly vintages of real-time data and survey forecasts for the United States over the past 40 years, we show that a recursively estimated VAR on real GDP growth, inflation and the nominal short-term interest rate generates predictions that are more consistent with survey forecasts than a benchmark fixed-coefficient counterpart. We then estimate a simple term structure model under the assumption that investor risk attitude is driven by near-term expectations of the three state variables. When we allow for evolving beliefs about the macroeconomy, the resulting term structure model provides a better fit to the cross section of yields than the benchmark model, especially at longer maturities, and exhibits better performance in out-of-sample predictions of future yield movements.

Keywords: Macro term structure model; Adaptive learning; Recursive least squares; Real-time data; Survey forecasts; Anticipated utility; SPF; Blue chip economic indicators (search for similar items in EconPapers)
JEL-codes: E43 E44 E47 G12 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (29)

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Working Paper: Evolving macroeconomic perceptions and the term structure of interest rates (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:2:p:239-254

DOI: 10.1016/j.jedc.2011.08.011

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