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Expectations from the Term Structure

Arunima Sinha

No 267, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: During 1984-2004, the learning model outperforms other models. The updating parameter is calibrated using survey data, and the parameters are revised similarly - investors pay attention to approximately past thirty quarters of data on the level, slope and curvature of the yield curve. When financial crisis data is included, both alternative models yield similar forecasts, while improving on the benchmark. Furthermore, while updating parameters for the level and curvature factors remain approximately the same; the gain corresponding to the slope factor decreases significantly. This implies that investors began to pay attention to longer series of historical data on the yield spread. The conduct of monetary policy after the crisis period could, therefore, utilize this fundamental change in investor behavior between the Great Moderation and the Great Recession.

Date: 2013
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