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An affine macro-finance term structure model for the euro area

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  • Lemke, Wolfgang

Abstract

A joint model of macroeconomic and term structure dynamics is specified and estimated for the euro area. The model comprises a backward-looking Phillips curve, a dynamic IS equation, a monetary policy rule as well as a specification of the dynamics of trend growth and the natural real interest rate. Under the condition of no arbitrage, yields of all maturities are affine functions of the macroeconomic driving forces. With the exception of a shock to potential output growth, the response of short-term yields to macroeconomic shocks is generally stronger than that of long-term yields. Impulse responses of all bond yields are fairly persistent, which reflects the persistence of their macroeconomic driving forces. Across the whole maturity spectrum, about ninety percent of the variation in yields is explained jointly by monetary policy shocks and shocks to the natural real rate of interest; the relative contribution of the latter shock increases with time to maturity. Cost-push shocks explain at most eight percent, while shocks to the output gap play an even less important role.

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Bibliographic Info

Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 19 (2008)
Issue (Month): 1 (March)
Pages: 41-69

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Handle: RePEc:eee:ecofin:v:19:y:2008:i:1:p:41-69

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Web page: http://www.elsevier.com/locate/inca/620163

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Cited by:
  1. Lemke, Wolfgang & Werner, Thomas, 2009. "The term structure of equity premia in an affine arbitrage-free model of bond and stock market dynamics," Working Paper Series 1045, European Central Bank.
  2. Iuliana Matei & Angela Cheptea, 2012. "Sovereign bond spread drivers in the EU market in the aftermath of the global financial crisis," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00845660, HAL.
  3. Badarinza, Cristian & Margaritov, Emil, 2011. "News and policy foresight in a macro-finance model of the US," Working Paper Series 1313, European Central Bank.
  4. Borgy, V. & Laubach, T. & Mésonnier, J-S. & Renne, J-P., 2011. "Fiscal Sustainability, Default Risk and Euro Area Sovereign Bond Spreads Markets," Working papers 350, Banque de France.
  5. Iuliana Matei & Angela Cheptea, 2012. "Sovereign bond spread drivers in the EU market in the aftermath of the global financial crisis," Working Papers hal-00845660, HAL.

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