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Real Term Structure and New Keynesian Models

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  • Burçin Kısacıkoğlu

    (Bilkent University)

Abstract

Recently some authors have argued that a New Keynesian model with simple modifications can match the nominal term structure of interest rates. In this paper, I investigate how well these models do in matching the term structure of real rates using TIPS data. I find that a standard New Keynesian mode that is successful in matching nominal term structure properties cannot match real yield curve features. Then I investigate >the model's relative success in fitting the nominal term structure and show that the model generates implausibly volatile inflation expectations and an implausibly high inflation risk premium to fit the nominal yield curve to compensate for the lack of fit to real yields. I study various potential extensions of the benchmark model and find that incorporating labor market frictions, long-run productivity risks, and preference shocks is not helpful in matching real term structure features.

Suggested Citation

  • Burçin Kısacıkoğlu, 2020. "Real Term Structure and New Keynesian Models," International Journal of Central Banking, International Journal of Central Banking, vol. 16(3), pages 95-139, June.
  • Handle: RePEc:ijc:ijcjou:y:2020:q:2:a:3
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • 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

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