Macro factors and the Term Structure of Interest Rates
2003-04-29
Research Paper
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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.
- Essentially affine term structure model
- long-run market expectations
- macroeconomic factors
- monetary policy rule
- M41 : Accounting
- G3 : Corporate Finance and Governance
- E52 : Monetary Policy (Targets, Instruments, and Effects)
- E43 : Determination of Interest Rates; Term Structure of Interest Rates
- M : Business Administration and Business Economics; Marketing; Accounting
- E44 : Financial Markets and the Macroeconomy
- factor
- term structure
- model
- inflation
- expectation
- structure
- interest
- inflation expectations
- output gap
- interest rates
- output
- dynamic
- level
- variable
- macro
- interest rate
- figure
- series
- inflation expectation
- probability measure
