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The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences

  • Fernández-Villaverde, Jesús
  • Koijen, Ralph
  • Rubio-Ramírez, Juan Francisco
  • van Binsbergen, Jules H.

We solve a dynamic stochastic general equilibrium (DSGE) model in which the representative household has Epstein and Zin recursive preferences. The parameters governing preferences and technology are estimated by means of maximum likelihood using macroeconomic data and asset prices, with a particular focus on the term structure of interest rates. We estimate a large risk aversion, an elasticity of intertemporal substitution higher than one, and substantial adjustment costs. Furthermore, we identify the tensions within the model by estimating it on subsets of these data. We conclude by pointing out potential extensions that might improve the model's fit.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7781.

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Date of creation: Apr 2010
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Handle: RePEc:cpr:ceprdp:7781
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