Template-Type: ReDIF-Paper 1.0
Author-Name: Dewachter, H.D.R.
Author-Name-Last: Dewachter
Author-Name-First: Hans
Author-Name: Lyrio, M.
Author-Name-Last: Lyrio
Author-Name-First: Marco
Title: Macro factors and the Term Structure of Interest Rates
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 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.
Creation-Date: 2003-04-29
File-URL: https://repub.eur.nl/pub/324/ERS-2003-037-F&A.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2003-037-F&A
Classification-JEL: E43, E44, E52, G3, M, M41
Keywords: Essentially affine term structure model, long-run market expectations, macroeconomic factors, monetary policy rule
Handle: RePEc:ems:eureri:324