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Yield curve in an estimated nonlinear macro model

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  • Taeyoung Doh

Abstract

What moves the yield curve? This paper specifies and estimates a dynamic stochastic general equilibrium (DSGE) model solved using a second order approximation to equilibrium conditions to answer this question. From the empirical analysis of U.S. data from 1983:Q1 to 2007:Q4, I find that the monetary policy response to the inflation gap defined by the difference between expected inflation and the inflation target of the central bank is a key channel transmitting macro shocks to the yield curve and that the degree of nominal rigidity determines which macro shocks are more important determinants of the yield curve. With the low degree of nominal rigidity, the inflation target of the central bank drives persistent movements of inflation and the yield curve while fluctuations of markups do so with the high degree of nominal rigidity. Although the estimated linear model puts nearly zero probability on the low degree of nominal rigidity, there is a positive probability mass in the nonlinear model. The analysis in this paper suggests caution on interpreting estimation results in which nonlinear terms of the DSGE model solution are ignored.

Suggested Citation

  • Taeyoung Doh, 2009. "Yield curve in an estimated nonlinear macro model," Research Working Paper RWP 09-04, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp09-04
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    3. Rudebusch, Glenn D. & Swanson, Eric T., 2008. "Examining the bond premium puzzle with a DSGE model," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 111-126, October.
    4. Amisano, Gianni & Tristani, Oreste, 2019. "Uncertainty shocks, monetary policy and long-term interest rates," Working Paper Series 2279, European Central Bank.
    5. Eickmeier, Sandra & Ng, Tim, 2015. "How do US credit supply shocks propagate internationally? A GVAR approach," European Economic Review, Elsevier, vol. 74(C), pages 128-145.
    6. Andrew Binning & Junior Maih, 2015. "Sigma point filters for dynamic nonlinear regime switching models," Working Paper 2015/10, Norges Bank.
    7. van der Wel, M., 2020. "Connecting Silos : On linking macroeconomics and finance, and the role of econometrics therein," ERIM Inaugural Address Series Research in Management 124748, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam..
    8. Grzegorz Wesoƚowski, 2018. "Do long-term interest rates drive GDP and inflation in small open economies? Evidence from Poland," Applied Economics, Taylor & Francis Journals, vol. 50(57), pages 6174-6192, December.
    9. Glenn D. Rudebusch, 2010. "Macro‐Finance Models Of Interest Rates And The Economy," Manchester School, University of Manchester, vol. 78(s1), pages 25-52, September.
    10. Joao F. Caldeira & Rangan Gupta & Tahir Suleman & Hudson S. Torrent, 2019. "Forecasting the Term Structure of Interest Rates of the BRICS: Evidence from a Nonparametric Functional Data Analysis," Working Papers 201911, University of Pretoria, Department of Economics.
    11. Hou, Keqiang & Li, Xing & Li, Zeguang & Wu, Ting, 2021. "Forecasting bond returns in a macro model," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 524-545.
    12. van Binsbergen, Jules H. & Fernández-Villaverde, Jesús & Koijen, Ralph S.J. & Rubio-Ramírez, Juan, 2012. "The term structure of interest rates in a DSGE model with recursive preferences," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 634-648.
    13. Refet S. Gürkaynak & Jonathan H. Wright, 2012. "Macroeconomics and the Term Structure," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 331-367, June.
    14. Challe, Edouard & Giannitsarou, Chryssi, 2014. "Stock prices and monetary policy shocks: A general equilibrium approach," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 46-66.
    15. Sergey Ivashchenko, 2014. "Forecasting in a Non-Linear DSGE Model," EUSP Department of Economics Working Paper Series Ec-02/14, European University at St. Petersburg, Department of Economics.
    16. Ian Dew‐Becker, 2014. "Bond Pricing with a Time‐Varying Price of Risk in an Estimated Medium‐Scale Bayesian DSGE Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(5), pages 837-888, August.
    17. Hall, Jamie, 2012. "Consumption dynamics in general equilibrium," MPRA Paper 43933, University Library of Munich, Germany.
    18. Apostolou, Barbara & Apostolou, Nicholas G. & Dorminey, Jack W., 2014. "The association of departures from spending rate equilibrium to municipal borrowing cost," Advances in accounting, Elsevier, vol. 30(1), pages 1-8.
    19. Den Haan, Wouter J. & De Wind, Joris, 2012. "Nonlinear and stable perturbation-based approximations," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1477-1497.
    20. Andreasen, Martin M., 2011. "Non-linear DSGE models and the optimized central difference particle filter," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1671-1695, October.

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