Investigating United Kingdom's monetary policy with Macro-Factor Augmented Dynamic Nelson–Siegel models

Jared Levant and Jun Ma

Journal of Empirical Finance, 2016, vol. 37, issue C, 117-127

Abstract: We employ the Dynamic Nelson–Siegel (DNS) model augmented with macroeconomic factors to investigate interactions of yields, real economic activity, and monetary policy in the United Kingdom. By explicitly accounting for the structural break during the early 90s at the time the UK exited the Exchange Rate Mechanism of the European Monetary System, we document a number of interesting findings. Specifically, there is evidence of a great moderation in the volatility of the term structure post-1992. At the same time, there is a significant reduction of the loading parameter in the DNS model, which suggests a greater influence of monetary policy and economic activity on the UK bond market. We find that the level and slope yield curve factors are related to inflation expectations and monetary policy, respectively, as has been found in related literature. Interestingly, the curvature factor which has been elusive in its relationship to macroeconomic fundamentals is found to be more strongly related to economic activity post-1992.

Keywords: Monetary policy; Term structure; Macroeconomic fundamentals; Dynamic Nelson–Siegel model; Factor-augmented VAR; Structural break (search for similar items in EconPapers)
JEL-codes: C51 E43 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539816300305
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:37:y:2016:i:c:p:117-127

DOI: 10.1016/j.jempfin.2016.03.003

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().