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Towards a Joint Characterization of Monetary Policy and the Dynamics of the Term Structure of Interest Rates

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  • Fendel, Ralf
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    Abstract

    The paper develops an empirical no-arbitrage Gaussian affine term structure model to explain the dynamics of the German term structure of interest rates from 1979 through 1998. In contrast to most affine term structure models two risk factors that drive the dynamics are linked to observable macroeconomics factors: output and inflation. The results obtained by a Kalman-filter-based maximum likelihood procedure indicate that the dynamics of the German term structure of interest rates can be sufficiently explained by expected variations in those macroeconomic factors plus an additional unobservable factor. Furthermore, we are able to extract a monetary policy reaction function within this no-arbitrage model of the term structure that closely resembles the empirical reaction functions that are based on the dynamics of the short rate only. --

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2004,24.

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    Date of creation: 2004
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    Handle: RePEc:zbw:bubdp1:2290

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    Keywords: affine term structure models; monetary policy rules; Kalman filter;

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    Cited by:
    1. Lemke, Wolfgang, 2008. "An affine macro-finance term structure model for the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 41-69, March.

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