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The shape of sovereign yield curve in an emerging economy: Do macroeconomic or external factors matter?

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  • Huseyin Ozturk

    () (Central Bank of the Republic of Turkey)

Abstract

We study the dynamic relation between sovereign yield curve and external shocks driven by global uncertainty and capital inflows. A Nelson–Siegel model is estimated to capture the three latent factors of the yield curve corresponding to level, slope and curvature. The state-space representation of the model is used to document the dynamic relation between the factors of the yield curve, the domestic macroeconomic variables (capacity utilization ratio, inflation, and monetary policy rate) and the external factors (global risk perception and capital flows). We find that although domestic macroeconomic variables have some impact on the future shape of the yield curve, the impact is becoming weaker after the 2008 global financial crisis. The results suggest that external factors emerge to have sizeable and significant impact on both macroeconomic variables and the latent factors. These results have important policy implications for policymakers especially for central bankers and debt managers when capital flows have been a major concern after the 2008 global financial crisis.

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  • Huseyin Ozturk, 2020. "The shape of sovereign yield curve in an emerging economy: Do macroeconomic or external factors matter?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(1), pages 83-112, February.
  • Handle: RePEc:kap:empiri:v:47:y:2020:i:1:d:10.1007_s10663-018-9405-y
    DOI: 10.1007/s10663-018-9405-y
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    More about this item

    Keywords

    Sovereign yield curve; Nelson–Siegel; Global risk perception; Capital flows;
    All these keywords.

    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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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