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Changing Beliefs and the Term Structure of Interest Rates: Cross-Equation Restrictions with Drifting Parameters

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  • Timothy Cogley

    (University of California, Davis)

Abstract

This paper shows how to estimate a Bayesian VAR with drifting parameters and nonlinear cross-equation restrictions. The restrictions promote parsimony by reducing the dimension of the drifting component in conditional mean parameters. As an application, the paper investigates an anticipated-utility version of the expectations model of the term structure. The estimates suggest that changing beliefs matter for understanding the yield curve and point to an intriguing clue about risk premia. Local approximations to the mean yield spread are highly correlated with the variance of the trend short rate, suggesting a connection between uncertainty about the long-run target of monetary policy and risk premia on long-term bonds. (Copyright: Elsevier)

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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 8 (2005)
Issue (Month): 2 (April)
Pages: 420-451

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Handle: RePEc:red:issued:v:8:y:2005:i:2:p:420-451

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Bernanke: Inflation Expectations and Inflation Forecasting
    by Mark Thoma in Economist's View on 2007-07-10 20:08:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Orphanides, Athanasios & Williams, John C, 2006. "Inflation Targeting under Imperfect Knowledge," CEPR Discussion Papers 5664, C.E.P.R. Discussion Papers.
  2. Mikhail Chernov & Ruslan Bikbov, 2009. "Monetary Policy Regimes and the Term Structure of Interest Rates," 2009 Meeting Papers 334, Society for Economic Dynamics.
  3. Timothy Cogley & Argia M. Sbordone, 2006. "Trend inflation and inflation persistence in the New Keynesian Phillips curve," Staff Reports 270, Federal Reserve Bank of New York.
  4. Monika Piazzesi & Martin Schneider, 2008. "Bond positions, expectations, and the yield curve," Working Paper 2008-02, Federal Reserve Bank of Atlanta.
  5. Sharon Kozicki & Gordon Sellon, 2005. "Longer-term perspectives on the yield curve and monetary policy," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-33.
  6. Athanasios Orphanides & Min Wei, 2010. "Evolving macroeconomic perceptions and the term structure of interest rates," Finance and Economics Discussion Series 2010-01, Board of Governors of the Federal Reserve System (U.S.).
  7. Andrew Ang & Jean Boivin & Sen Dong & Rudy Loo-Kung, 2009. "Monetary Policy Shifts and the Term Structure," NBER Working Papers 15270, National Bureau of Economic Research, Inc.
  8. Michael T. Kiley, 2008. "Monetary policy actions and long-run inflation expectations," Finance and Economics Discussion Series 2008-03, Board of Governors of the Federal Reserve System (U.S.).
  9. Philippe Bacchetta & Eric van Wincoop, 2009. "On the Unstable Relationship between Exchange Rates and Macroeconomic Fundamentals," Working Papers 272009, Hong Kong Institute for Monetary Research.
  10. Elmar Mertens, 2011. "Measuring the level and uncertainty of trend inflation," Finance and Economics Discussion Series 2011-42, Board of Governors of the Federal Reserve System (U.S.).
  11. Monika Piazzesi & Martin Schneider, 2006. "Equilibrium Yield Curves," NBER Working Papers 12609, National Bureau of Economic Research, Inc.
    • Monika Piazzesi & Martin Schneider, 2007. "Equilibrium Yield Curves," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 389-472 National Bureau of Economic Research, Inc.
  12. Kurmann, Andre, 2007. "VAR-based estimation of Euler equations with an application to New Keynesian pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 767-796, March.

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