A Macroeconomic Model of the Term Structure of Interest Rates in Mexico
Josué Fernando Cortés Espada and
Manuel Ramos Francia
No 2008-10, Working Papers from Banco de México
This paper investigates how different macroeconomic shocks affect the term-structure of interest rates in Mexico. In particular, we develop a model that combines a no-arbitrage specification of the term structure with a macroeconomic model of a small open economy. We find that shocks that are perceived to have a persistent effect on inflation affect the level of the yield curve. The effect on medium and long-term yields results from the increase in expected future short rates and in risk premia. With respect to demand shocks, our results show that a positive shock leads to an upward flattening shift in the yield curve. The flattening of the curve is explained by both the monetary policy response and the time-varying term premia.
Keywords: Term-Structure; No-Arbitrage; Macroeconomic Shocks. (search for similar items in EconPapers)
JEL-codes: C13 E43 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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