Advanced Search
MyIDEAS: Login to save this article or follow this journal

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

Contents:

Author Info

  • 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)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://dx.doi.org/10.1016/j.red.2005.01.004
File Function: Full text
Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and ScienceDirect institutional members. See http://www.sciencedirect.com/ for details.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

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

as in new window
Handle: RePEc:red:issued:v:8:y:2005:i:2:p:420-451

Contact details of provider:
Postal: Review of Economic Dynamics Academic Press Editorial Office 525 "B" Street, Suite 1900 San Diego, CA 92101
Fax: 1-314-444-8731
Email:
Web page: http://www.EconomicDynamics.org/review.htm
More information through EDIRC

Order Information:
Email:
Web: http://www.EconomicDynamics.org/RED17.htm

Related research

Keywords:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
  2. Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1997. ""Peso Problem" Explanations for Term Structure Anomalies," NBER Working Papers 6147, National Bureau of Economic Research, Inc.
  3. Oscar Jorda & Kevin Salyer, 2003. "The Response of Term Rates to Monetary Policy Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 941-962, October.
  4. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(3), pages 613-652, June.
  5. Jesús Fernández-Villaverde & Juan Francisco Rubio-Ramírez, 2004. "Estimating dynamic equilibrium economies: linear versus nonlinear likelihood," Working Paper, Federal Reserve Bank of Atlanta 2004-3, Federal Reserve Bank of Atlanta.
  6. Thomas J. Sargent, 1978. "A note on maximum likelihood estimation of the rational expectations model of the term structure," Staff Report, Federal Reserve Bank of Minneapolis 26, Federal Reserve Bank of Minneapolis.
  7. Fabio Canova & Luca Gambetti, 2004. "On the Time Variations of US Monetary Policy: Who is right?," Money Macro and Finance (MMF) Research Group Conference 2004, Money Macro and Finance Research Group 96, Money Macro and Finance Research Group.
  8. Éric Jacquier & Nicholas G. Polson & Peter E. Rossi, 1999. "Stochastic Volatility: Univariate and Multivariate Extensions," CIRANO Working Papers, CIRANO 99s-26, CIRANO.
  9. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 1994. "Bayesian Analysis of Stochastic Volatility Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 12(4), pages 371-89, October.
  10. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
  11. John H. Cochrane & Monika Piazzesi, 2002. "Bond Risk Premia," NBER Working Papers 9178, National Bureau of Economic Research, Inc.
  12. Jesús Fernández-Villaverde & Juan Francisco Rubio-Ramírez, 2004. "Estimating nonlinear dynamic equilibrium economies: a likelihood approach," Working Paper, Federal Reserve Bank of Atlanta 2004-1, Federal Reserve Bank of Atlanta.
  13. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  14. Luca Benati, 2003. "Evolving Post-World War II U.K. Economic Performance," Computing in Economics and Finance 2003, Society for Computational Economics 171, Society for Computational Economics.
  15. Neil Shephard, 2005. "Stochastic Volatility," Economics Papers 2005-W17, Economics Group, Nuffield College, University of Oxford.
  16. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The Conquest of South American Inflation," NBER Working Papers 12606, National Bureau of Economic Research, Inc.
  17. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, Elsevier, vol. 44(3), pages 309-348, June.
  18. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  19. David K. Backus & Chris I. Telmer & Liuren Wu, 1999. "Design and Estimation of Affine Yield Models," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 5, Carnegie Mellon University, Tepper School of Business.
  20. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
  21. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers, Federal Reserve Bank of Minneapolis 127, Federal Reserve Bank of Minneapolis.
  22. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features: Reply," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 11(4), pages 393-95, October.
  23. Timothy Cogley & Thomas J. Sargent, 2002. "Evolving Post-World War II U.S. Inflation Dynamics," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2001, Volume 16, pages 331-388 National Bureau of Economic Research, Inc.
  24. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  25. Kenneth A. Froot, 1987. "New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates," NBER Working Papers 2363, National Bureau of Economic Research, Inc.
  26. Backus, David & Foresi, Silverio & Mozumdar, Abon & Wu, Liuren, 2001. "Predictable changes in yields and forward rates," Journal of Financial Economics, Elsevier, Elsevier, vol. 59(3), pages 281-311, March.
  27. Timothy Cogley & Thomas Sargent, . "Drifts and Volatilities: Monetary Policies and Outcomes in the Post WWII US," Working Papers, Department of Economics, W. P. Carey School of Business, Arizona State University 2133503, Department of Economics, W. P. Carey School of Business, Arizona State University.
  28. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
  29. Kozicki, Sharon & Tinsley, P. A., 2001. "Term structure views of monetary policy under alternative models of agent expectations," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(1-2), pages 149-184, January.
  30. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
  31. Mark W. Watson, 1999. "Explaining the increased variability in long-term interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Fall, pages 71-96.
  32. Barsky, Robert B & De Long, J Bradford, 1993. "Why Does the Stock Market Fluctuate?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(2), pages 291-311, May.
  33. Benati, Luca, 2008. "Investigating inflation persistence across monetary regimes," Working Paper Series, European Central Bank 0851, European Central Bank.
  34. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 405-443, 02.
  35. David Backus & Silverio Foresi & Chris Telmer, 1998. "Discrete-Time Models of Bond Pricing," NBER Working Papers 6736, National Bureau of Economic Research, Inc.
  36. Geert Bekaert, 2001. "Expectations Hypotheses Tests," Journal of Finance, American Finance Association, American Finance Association, vol. 56(4), pages 1357-1394, 08.
  37. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 680-92, September.
  38. Boivin, Jean, 2006. "Has U.S. Monetary Policy Changed? Evidence from Drifting Coefficients and Real-Time Data," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(5), pages 1149-1173, August.
  39. Jean Boivin & Marc Giannoni, 2002. "Has monetary policy become less powerful?," Staff Reports, Federal Reserve Bank of New York 144, Federal Reserve Bank of New York.
  40. Christopher Sims & Tao Zha, 2002. "Macroeconomic switching," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  41. Robert F. Engle & Sharon Kozicki, 1990. "Testing For Common Features," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0091, National Bureau of Economic Research, Inc.
  42. Cooley, Thomas F & Prescott, Edward C, 1976. "Estimation in the Presence of Stochastic Parameter Variation," Econometrica, Econometric Society, Econometric Society, vol. 44(1), pages 167-84, January.
  43. Timmermann, Allan G, 1993. "How Learning in Financial Markets Generates Excess Volatility and Predictability in Stock Prices," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(4), pages 1135-45, November.
Full references (including those not matched with items on IDEAS)

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.
as in new window

Cited by:
  1. Athanasios Orphanides & John C. Williams, 2006. "Inflation Targeting under Imperfect Knowledge," Computing in Economics and Finance 2006, Society for Computational Economics 38, Society for Computational Economics.
  2. Michael T. Kiley, 2008. "Monetary policy actions and long-run inflation expectations," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2008-03, Board of Governors of the Federal Reserve System (U.S.).
  3. Timothy Cogley & Argia M. Sbordone, 2006. "Trend inflation and inflation persistence in the New Keynesian Phillips curve," Staff Reports, Federal Reserve Bank of New York 270, Federal Reserve Bank of New York.
  4. Athanasios Orphanides & Min Wei, 2010. "Evolving macroeconomic perceptions and the term structure of interest rates," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-01, Board of Governors of the Federal Reserve System (U.S.).
  5. Bacchetta, Philippe & van Wincoop, Eric, 2009. "On the Unstable Relationship between Exchange Rates and Macroeconomic Fundamentals," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7309, C.E.P.R. Discussion Papers.
  6. Monika Piazzesi & Martin Schneider, 2007. "Equilibrium Yield Curves," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2006, Volume 21, pages 389-472 National Bureau of Economic Research, Inc.
  7. Kurmann, Andre, 2007. "VAR-based estimation of Euler equations with an application to New Keynesian pricing," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(3), pages 767-796, March.
  8. Mikhail Chernov & Ruslan Bikbov, 2009. "Monetary Policy Regimes and the Term Structure of Interest Rates," 2009 Meeting Papers, Society for Economic Dynamics 334, Society for Economic Dynamics.
  9. Elmar Mertens, 2011. "Measuring the level and uncertainty of trend inflation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2011-42, Board of Governors of the Federal Reserve System (U.S.).
  10. Sharon Kozicki & Gordon Sellon, 2005. "Longer-term perspectives on the yield curve and monetary policy," Economic Review, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-33.
  11. Andrew Ang & Jean Boivin & Sen Dong & Rudy Loo-Kung, 2011. "Monetary Policy Shifts and the Term Structure," Review of Economic Studies, Oxford University Press, vol. 78(2), pages 429-457.
  12. Monika Piazzesi & Martin Schneider, 2008. "Bond positions, expectations, and the yield curve," Working Paper, Federal Reserve Bank of Atlanta 2008-02, Federal Reserve Bank of Atlanta.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:red:issued:v:8:y:2005:i:2:p:420-451. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.