Year: 2006
Type: article
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.
Authors: Hans Dewachter, Marco Lyrio
Institution: KU Leuven
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2106538723