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Filtering Long-Run Inflation Expectations with a Structural Macro Model of the Yield Curve

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  • Marco Lyrio
  • Hans Dewachter

Abstract

This paper proposes a methodolgy to estimate structural macroeconomic models including non-stationary steady state dynamics. Using a transitory-permanent decomposition of the Euler equations, the method first solves for the transitory dynamics and subsequently provides the solution for the full model by substituting back in the steady state dynamics. The method is applied to models linking the macroeconomic dynamics to the term structure of interest rates. We find that non-stationary variables play a crucial role in this respect. More specifically, long-run inflation expectations, estimated on the macroeconomic variables, turn out to be extremely important in the determination of the term structure

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File URL: http://repec.org/sce2004/up.22078.1077877675.pdf
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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 188.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:188

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Keywords: Structural model; New-Keynesian model; filtering procedure; essentially affine term structure model; time-varying inflation expectations;

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Cited by:
  1. Michael R. Pakko & William T. Gavin & Finn E. Kydland, 2005. "Monetary Policy, Taxes, and the Business Cycle," 2005 Meeting Papers 265, Society for Economic Dynamics.

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