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The Indonesian macroeconomy and the yield curve: A dynamic latent factor approach

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  • Djuranovik, Leslie

Abstract

We develop a fine representation of the term structure of interest rates in Indonesia and create a link between the yield curve and macroeconomic fundamentals. We construct a state-space representation of the yield curve as a function of three time-varying parameters: level, slope, and curvature factors. The model is then expanded to include three macroeconomic variables: real activity, inflation, and interest rates. We find that the dynamic latent factor model provides a very good fit to characterise the Indonesian yield curve in terms of the statistical properties for each maturity, and in terms of the properties of three latent yield-curve factors. With regards to the relationship to the macroeconomy, we find that there is a large amount of idiosyncratic variation in the yield curve movements. Therefore, macroeconomic variables can only explain small dynamics in the yield curve.

Suggested Citation

  • Djuranovik, Leslie, 2014. "The Indonesian macroeconomy and the yield curve: A dynamic latent factor approach," Journal of Asian Economics, Elsevier, vol. 34(C), pages 1-15.
  • Handle: RePEc:eee:asieco:v:34:y:2014:i:c:p:1-15
    DOI: 10.1016/j.asieco.2014.06.001
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    Cited by:

    1. repec:eee:reveco:v:54:y:2018:i:c:p:178-192 is not listed on IDEAS
    2. repec:kap:iecepo:v:14:y:2017:i:2:d:10.1007_s10368-016-0340-8 is not listed on IDEAS

    More about this item

    Keywords

    Yield curve; Interest rates; Factor model; State-space model;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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