Macro Factors and the Term Structure of Interest Rates

Hans Dewachter and Marco Lyrio ()

Journal of Money, Credit and Banking, 2006, vol. 38, issue 1, 119-140

Abstract: This paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long-run expectations. The model extends the approach pioneered by Kozicki and Tinsley (2001) by modeling consistently long-run inflation expectations simultaneously with the term structure. Application to the U.S. economy shows the importance of long-run inflation expectations in the modeling of long-term bond yields. The paper also provides a macroeconomic interpretation for the latent factors found in standard finance models of the yield curve: the level factor represents the long-run inflation expectation of agents; the slope factor captures business cycle conditions; and the curvature factor expresses a clear independent monetary policy factor.

Date: 2006
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Related works:
Working Paper: Macro factors and the term structure of interest rates (2004)
Working Paper: Macro factors and the Term Structure of Interest Rates (2003)
Working Paper: Macro Factors and the Term Structure of Interest Rates (2003)
Working Paper: Macro Factors and the Term Structure of Interest Rates (2003)
Working Paper: Macro Factors and the Term Structure of Interest Rates (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:38:y:2006:i:1:p:119-140

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