Macro factors and the Term Structure of Interest Rates

Hans Dewachter and Marco Lyrio ()

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

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. This model thus avoids the standard pre-filtering of long-run expectations, as proposed by Kozicki and Tinsley (2001). Application to the U.S. economy shows the importance of long-run inflation expectations in the modelling of long-term bonds. The paper also provides a macroeconomic interpretation for the factors found in a latent factor model of the term structure. More specifically, we find that the standard "level" factor is highly correlated to long-run inflation expectations, the "slope" factor captures temporary business cycle conditions, while the "curvature" factor represents a clear independent monetary policy factor.

Keywords: Essentially affine term structure model; long-run market expectations; macroeconomic factors; monetary policy rule (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 G3 M M41 (search for similar items in EconPapers)
Date: 2003-04-29
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Macro Factors and the Term Structure of Interest Rates (2006)
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 (2002)
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