Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144357
Authors: 
Dewachter, Hans
Year of Publication: 
2008
Series/Report no.: 
Working Paper Research 144
Abstract: 
In this paper we estimate an encompassing Macro-Finance model allowing for time variation in the equilibrium real rate, mispricing and learning dynamics. The encompassing model specification incorporates (i) a small-scale (semi-) structural New-Keynesian model, (ii) flexible price of risk specifications, (iii) liquidity premiums in the form of (constant) deviations from (Gaussian) no-arbitrage and (iv) learning dynamics. This model is estimated on US data using MCMC techniques. We find that the encompassing model outperforms significantly standard Macro-Finance models in terms of marginal likelihood and BIC. Three findings stand out. First, unlike standard Macro-Finance models, a substantial fraction of the variation in long-term yields is attributed to changes in the perceived equilibrium real rate. Second, statistically and economically significant learning effects, especially for inflation expectations, are found. Finally, historical decompositions show that the model can replicate the US yield curve dynamics over the period 1960-2007.
Subjects: 
Imperfect information
New-Keynesian macroeconomic dynamics
equilibrium real rate
affine yield curve models
JEL: 
E43
E44
E52
Document Type: 
Working Paper

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