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A SVECM Model of the UK Economy and The Term Premium

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  • Dungey, Mardi

    ()

  • Tugrul Vehbi, M

    (School of Economics and Finance, University of Tasmania)

Abstract

The term premium is estimated from an empirically coherent open economy VAR model of the UK economy where the model speci?cally 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 in?ation 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://eprints.utas.edu.au/11610/1/DP2011_05_TP_Paper_Dungey_Vehbi.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 11610.

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Length: 29 pages
Date of creation: May 2011
Date of revision:
Publication status: Published by University of Tasmania, School of Economics & Finance -Thesis 2006
Handle: RePEc:tas:wpaper:11610

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Keywords: Consumer Economics: Theory; Consumer Economics: Empirical Analysis; Demographic Economics;

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  1. Mardi Dungey & Renee Fry, 2007. "The Identification Of Fiscal And Monetary Policy In A Structural Var," CAMA Working Papers 2007-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Joyce, Michael A.S. & Lildholdt, Peter & Sorensen, Steffen, 2010. "Extracting inflation expectations and inflation risk premia from the term structure: A joint model of the UK nominal and real yield curves," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 281-294, February.
  3. Andrea Carriero & Carlo Favero & Iryna Kaminska, 2004. "Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates," Working Papers 253, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Ferderer, J. Peter & Shadbegian, Ronald, 1993. "A comparison of alternative term premium estimates," The Quarterly Review of Economics and Finance, Elsevier, vol. 33(2), pages 179-195.
  5. Glenn D. Rudebusch & Brian P. Sack & Eric T. Swanson, 2006. "Macroeconomic implications of changes in the term premium," Working Paper Series 2006-46, Federal Reserve Bank of San Francisco.
  6. Mardi Dungey & Charles Goodhart & Demosthenes Tambakis, 2005. "The Us Treasury Market In August 1998: Untangling The Effects Og Hong Kong And Russia With High Frequency Data," CAMA Working Papers 2005-25, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Christian Upper & Thomas Werner, 2002. "How resilient are financial markets to stress? Bund futures and bonds during the 1998 turbulence," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 110-123 Bank for International Settlements.
  8. Mardi Dungey & Adrian Pagan, 2008. "Extending an SVAR Model of the Australian Economy," NCER Working Paper Series 21, National Centre for Econometric Research.
  9. Bianchi, Francesco & Mumtaz, Haroon & Surico, Paolo, 2009. "The great moderation of the term structure of UK interest rates," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 856-871, September.
  10. Reuben A. Kessel, 1965. "The Cyclical Behavior of the Term Structure of Interest Rates," NBER Books, National Bureau of Economic Research, Inc, number kess65-1, July.
  11. Dennis, Richard & Leitemo, Kai & Söderström, Ulf, 2007. "Monetary Policy in a Small Open Economy with a Preference for Robustness," CEPR Discussion Papers 6067, C.E.P.R. Discussion Papers.
  12. Philippe D Karam & A. R. Pagan, 2008. "A Small Structural Monetary Policy Model for Small Open Economies with Debt Accumulation," IMF Working Papers 08/64, International Monetary Fund.
  13. Mardi Dungey & Renee Fry, 2007. "The Identification Of Fiscal And Monetary Policy In A Structural Var," CAMA Working Papers 2007-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  14. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Assessing the Sources of Changes in the Volatility of Real Growth," NBER Working Papers 11946, National Bureau of Economic Research, Inc.
  15. Mills, Terence C. & Pentecost, Eric J., 2003. "Is there a relationship between real exchange rate movements and the output cycle?," Economic Modelling, Elsevier, vol. 20(3), pages 593-603, May.
  16. Beenstock, Michael & Longbottom, J Andrew, 1981. "The Term Structure of Interest Rates in a Small Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(1), pages 44-59, February.
  17. Q. Farooq Akram & Ragnar Nymoen, 2009. "Model Selection for Monetary Policy Analysis: How Important is Empirical Validity?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 35-68, 02.
  18. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  19. 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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