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A joint econometric model of macroeconomic and term structure dynamics

Peter Hoerdahl and Oreste Tristani ()
Authors registered in the RePEc Author Service: Peter Hördahl ()

No 379, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: We construct and estimate a joint model of macroeconomic and yield curve dynamics. A small-scale backward/forward-looking rational expectations model describes the macroeconomy. Bond yields are affine functions of the state variables of the macromodel, and are derived assuming absence of arbitrage opportunities and a flexible price of risk specification. While maintaining the tractability of the affine set-up, our approach provides a way to interpret yield dynamics in terms of macroeconomic fundamentals; time-varying risk premia, in particular, are associated with the fundamental sources of risk in the economy. In an application to German data, the model is able to capture the salient features of the term structure of interest rates and its forecasting performance matches that of the best available models based on latent factors. The model has also considerable success in accounting for the empirical failure of the expectations hypothesis.

Keywords: Affine term structure models; policy rules; new neo-classical synthesis (search for similar items in EconPapers)
JEL-codes: E13 E43 E47 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mac and nep-mon
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Related works:
Journal Article: A joint econometric model of macroeconomic and term-structure dynamics (2006) Downloads
Working Paper: A joint econometric model of macroeconomic and term structure dynamics (2004) Downloads
Working Paper: A joint econometric model of macroeconomic and term structure dynamics (2004) Downloads
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