Title: Estimation of a joint model for the term structure of interest rates and the macroeconomy
Authors: Dewachter, Hans
Lyrio, M
Maes, Konstantijn
Issue Date: 2001
Publisher: K.U.Leuven, Faculty of Economics and Applied Economics : Department of Economics
Series Title: CES - Discussion Paper Series (DPS) 01.18 pages:1-61
Abstract: In this paper, we present a stylized continuous time model integrating the macroeconomy and the bond markets. We use this framework to estimate (real) interest rate policy rules using information contained in both macroeconomic variables (i.e. output and inflation) and in the term structure of interest rates. We extend the standard Kalman filter procedure in order to estimate this model efficiently. Application to the U.S. economy shows that this model is able to estimate the macroeconomic dynamics accurately and that the standard feedback rule only in observable factors is not valid within this framework. Moreover, we find that observable macroeconomic variables do not explain much of the term structure. However, (filtered) stochastic central tendencies of these macroeconomic variables do. Finally, both observable and non-observable factors determine the risk premia and hence the excess holding returns of the bonds.
Publication status: published
KU Leuven publication type: IR
Appears in Collections:Research Center of International Economics, Leuven
Department of Economics, Leuven - miscellaneous

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