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Term structure and real-time learning

Author

Listed:
  • Pablo Aguilar

    () (Banco de España)

  • Jesús Vázquez

    () (Universidad del País Vasco (UPV/EHU))

Abstract

This paper introduces the term structure of interest rates into a medium-scale DSGE model. This extension results in a multi-period forecasting model that is estimated under both adaptive learning and rational expectations. Term structure information enables us to characterize agents’ expectations in real time, which addresses an imperfect information issue mostly neglected in the adaptive learning literature. Relative to the rational expectations version, our estimated DSGE model under adaptive learning largely improves the model fit to the data, which include not just macroeconomic data but also the yield curve and the consumption growth and inflation forecasts reported in the Survey of Professional Forecasters. Moreover, the estimation results show that most endogenous sources of aggregate persistence are dramatically undercut when adaptive learning based on multi-period forecasting is incorporated through the term structure of interest rates.

Suggested Citation

  • Pablo Aguilar & Jesús Vázquez, 2018. "Term structure and real-time learning," Working Papers 1803, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1803
    as

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    File URL: https://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/18/Files/dt1803e.pdf
    File Function: First version, January 2018
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    References listed on IDEAS

    as
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    4. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    5. Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
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    11. Sinha, Arunima, 2015. "Government debt, learning and the term structure," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 268-289.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Term structure and real-time learning
      by Christian Zimmermann in NEP-DGE blog on 2018-04-07 00:41:41

    More about this item

    Keywords

    real-time adaptive learning; term spread; multi-period forecasting; short-versus long-sighted agents; SPF forecasts; medium-scale DSGE model;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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