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A Macroeconomic Model of the Term Structure of Interest Rates in Mexico

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  • Josué Fernando Cortés Espada
  • Manuel Ramos Francia
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    Abstract

    This paper investigates how different macroeconomic shocks affect the term-structure of interest rates in Mexico. In particular, we develop a model that combines a no-arbitrage specification of the term structure with a macroeconomic model of a small open economy. We find that shocks that are perceived to have a persistent effect on inflation affect the level of the yield curve. The effect on medium and long-term yields results from the increase in expected future short rates and in risk premia. With respect to demand shocks, our results show that a positive shock leads to an upward flattening shift in the yield curve. The flattening of the curve is explained by both the monetary policy response and the time-varying term premia.

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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B051AB723-E670-D0ED-3180-8062E2A4E228%7D.pdf
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    Bibliographic Info

    Paper provided by Banco de México in its series Working Papers with number 2008-10.

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    Date of creation: Jul 2008
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    Handle: RePEc:bdm:wpaper:2008-10

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    Web page: http://www.banxico.org.mx
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    Related research

    Keywords: Term-Structure; No-Arbitrage; Macroeconomic Shocks.;

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    References

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    1. Andrew Ang & Sen Dong & Monika Piazzesi, 2005. "No-arbitrage Taylor rules," Proceedings, Federal Reserve Bank of San Francisco.
    2. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    3. Seonghoon Cho & Antonio Moreno & Geert Bekaert, 2005. "New-Keynesian Macroeconomics and the Term Structure," Faculty Working Papers 04/05, School of Economics and Business Administration, University of Navarra.
    4. Andrew Ang & Monika Piazzesi & Min Wei, 2004. "What Does the Yield Curve Tell us about GDP Growth?," NBER Working Papers 10672, National Bureau of Economic Research, Inc.
    5. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Harvard Institute of Economic Research Working Papers 1713, Harvard - Institute of Economic Research.
    6. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
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    Cited by:
    1. Santiago García-Verdú, 2011. "On the Term Structure of Interest Rates of the Mexican Government," Working Papers 2011-18, Banco de México.

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