Title: Macro factors and the term structure of interest rates
Authors: Dewachter, Hans
Lyrio, Marco
Issue Date: 2003
Publisher: K.U.Leuven, Faculty of Economics and Applied Economics : Department of Economics
Series Title: CES - Discussion paper series (DPS) 03.04 pages:1-42
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 modeling 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.
Publication status: published
KU Leuven publication type: IR
Appears in Collections:Research Center of International Economics, Leuven

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