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A SVECM Model of the UK Economy and The Term Premium

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  • MARDI DUNGEY

    ()

  • M.TUGRUL VEHBI

    ()

Abstract

The term premium is estimated from an empirically coherent open economy VAR model of the UK economy where the model specifically accounts for the mixed nature of the data and cointegration between some variables. Using this framework the estimated negative term premia for 1980-2007 is decomposed into its contributing shocks, where the role of inflation and monetary policy shocks are shown to be dominant in the evolution of the term premium. Projecting into the 2008 crisis period reveals the extent of the shocks to the UK economy, and also shows the similarities in term premia behaviour with those experienced during the 1998 Russian crisis.

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File URL: http://cama.crawford.anu.edu.au/pdf/working-papers/2011/262011.pdf
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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2011-26.

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Length: 28 pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:een:camaaa:2011-26

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  1. Carriero, Andrea & Favero, Carlo A. & Kaminska, Iryna, 2006. "Financial factors, macroeconomic information and the Expectations Theory of the term structure of interest rates," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 339-358.
  2. Joyce, Michael & Kaminska, Iryna & Lildholdt, Peter, 2008. "Understanding the real rate conundrum: an application of no-arbitrage finance models to the UK real yield curve," Bank of England working papers 358, Bank of England.
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