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Evolving macroeconomic perceptions and the term structure of interest rates

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  • Athanasios Orphanides
  • Min Wei

Abstract

We explore the role of evolving beliefs regarding the structure of the macroeconomy in improving our understanding of the term structure of interest rates within the context of a simple macro-finance model. Using quarterly vintages of real-time data and survey forecasts for the United States over the past 40 years, we show that a recursively estimated VAR on real GDP growth, inflation and the nominal short-term interest generates predictions that are more consistent with survey forecasts than a benchmark fixed-coefficient counterpart. We then estimate a simple term structure model under the assumption that the investors' risk attitude is driven by near-term expectations of the three state variables. When we allow for evolving beliefs about the macroeconomy, the resulting term structure model provides a better fit to the cross section of yields than the benchmark model, especially at longer maturities, and exhibits better performance in out-of-sample predictions of future yield movements.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2010-01.

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Date of creation: 2010
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Handle: RePEc:fip:fedgfe:2010-01

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Keywords: Macroeconomics ; Econometric models;

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Citations

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Cited by:
  1. Jardet, C. & Monfort, A. & Pegoraro, F., 2009. "No-arbitrage Near-Cointegrated VAR(p) Term Structure Models, Term Premia and GDP Growth," Working papers 234, Banque de France.
  2. repec:dgr:uvatin:2012076 is not listed on IDEAS
  3. Daniela Osterrieder, 2013. "Interest Rates with Long Memory: A Generalized Affine Term-Structure Model," CREATES Research Papers 2013-17, School of Economics and Management, University of Aarhus.
  4. Dick van Dijk & Siem Jan Koopman & Michel van der Wel & Jonathan H. Wright, 2012. "Forecasting Interest Rates with Shifting Endpoints," Tinbergen Institute Discussion Papers 12-076/4, Tinbergen Institute.
  5. Zhongliang Tuo, 2013. "Hedging Against the Interest-rate Risk by Measuring the Yield-curve Movement," Papers 1312.6841, arXiv.org.

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