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A Macro‐Finance Model of the Term Structure, Monetary Policy and the Economy

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  • Glenn D. Rudebusch
  • Tao Wu

Abstract

This article develops and estimates a macro‐finance model that combines a canonical affine no‐arbitrage finance specification of the term structure of interest rates with standard macroeconomic aggregate relationships for output and inflation. Based on this combination of yield curve and macroeconomic structure and data, we obtain several interesting results: (1) the latent term structure factors from no‐arbitrage finance models appear to have important macroeconomic and monetary policy underpinnings, (2) there is no evidence of a slow partial adjustment of the policy interest rate by the central bank, and (3) both forward‐looking and backward‐looking elements play roles in macroeconomic dynamics.

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  • Glenn D. Rudebusch & Tao Wu, 2008. "A Macro‐Finance Model of the Term Structure, Monetary Policy and the Economy," Economic Journal, Royal Economic Society, vol. 118(530), pages 906-926, July.
  • Handle: RePEc:wly:econjl:v:118:y:2008:i:530:p:906-926
    DOI: 10.1111/j.1468-0297.2008.02155.x
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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