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Macroeconomic models and the yield curve: An assessment of the fit

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  • Chadha, Jagjit S.
  • Holly, Sean

Abstract

Many have questioned the empirical relevance of the Calvo-Yun model. This paper adds a term structure to three widely studied macroeconomic models (Calvo-Yun, hybrid and Svensson). We back out from observations on the yield curve the underlying macroeconomic model that most closely matches the level, slope and curvature of the yield curve. With each model we trace the response of the yield curve to macroeconomic shocks. We assess the fit of each model against the observed behaviour of interest rates and find limited support for the Calvo-Yun model in terms of fit with the observed yield curve, we find some support for the hybrid model but the Svensson model performs best.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 8 (August)
Pages: 1343-1358

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:8:p:1343-1358

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Keywords: Macromodels Yield curve Persistence;

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Cited by:
  1. Afonso, António & Martins, Manuel M.F., 2012. "Level, slope, curvature of the sovereign yield curve, and fiscal behaviour," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1789-1807.

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