The Canadian Macroeconomy and the Yield Curve: An Equilibrium-Based Approach

René Garcia and Richard Luger

Staff Working Papers from Bank of Canada

Abstract: The authors develop and estimate an equilibrium-based model of the Canadian term structure of interest rates. The proposed model incorporates a vector-autoregression description of key macroeconomic dynamics and links them to those of the term structure, where identifying restrictions are based on the first-order conditions that describe the representative investor's optimal consumption and portfolio plan. A remarkable result is that the in-sample average pricing errors obtained with the equilibrium-based model are only slightly larger than those obtained with a far more flexible no-arbitrage model. The gains associated with parsimony become obvious out-of-sample, where the equilibrium model delivers much more accurate predictions, especially for yields with longer-term maturities. The preferred equilibrium model has impulse responses that are consistent with long-term inflation expectations being anchored, so a surprise increase in inflation does not necessarily raise expectations of higher future inflation.

Keywords: Interest; rates (search for similar items in EconPapers)
JEL-codes: E43 E44 E47 E52 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2005
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2010/02/wp05-36.pdf

Related works:
Journal Article: The Canadian macroeconomy and the yield curve: an equilibrium-based approach (2007)
Journal Article: The Canadian macroeconomy and the yield curve: an equilibrium‐based approach (2007)
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:bca:bocawp:05-36

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().