Filtering Long-Run Inflation Expectations with a Structural Macro Model of the Yield Curve

Marco Lyrio () and Hans Dewachter

No 188, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: This paper proposes a methodolgy to estimate structural macroeconomic models including non-stationary steady state dynamics. Using a transitory-permanent decomposition of the Euler equations, the method first solves for the transitory dynamics and subsequently provides the solution for the full model by substituting back in the steady state dynamics. The method is applied to models linking the macroeconomic dynamics to the term structure of interest rates. We find that non-stationary variables play a crucial role in this respect. More specifically, long-run inflation expectations, estimated on the macroeconomic variables, turn out to be extremely important in the determination of the term structure

Keywords: Structural model; New-Keynesian model; filtering procedure; essentially affine term structure model; time-varying inflation expectations (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
Date: 2004-08-11
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf4:188

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