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A macro-finance model of the term structure, monetary policy, and the economy

Listed author(s):
  • Glenn D. Rudebusch
  • Tao Wu

This paper develops and estimates a macro-finance model that combines a canonical affine no-arbitrage finance specification of the term structure with standard macroeconomic aggregate relationships for output and inflation. From this new empirical formulation, we obtain several important results: (1) the latent term structure factors from finance no-arbitrage models appear to have important macroeconomic and monetary policy underpinnings, (2) there is no evidence of monetary policy inertia or a slow partial adjustment of the policy interest rate by the Federal Reserve, and (3) both forward-looking and backward-looking elements play important roles in macroeconomic dynamics.

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File URL: http://www.frbsf.org/economic-research/files/wp03-17bk.pdf
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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2003-17.

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Date of creation: 2003
Handle: RePEc:fip:fedfwp:2003-17
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