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What Drives the Term Structure in the Euro Area? Evidence from a Model with Feedback

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Abstract

I study a general-equilibrium model of the term structure where bond prices are an integral part of the monetary transmission mechanism. The model is estimated on quarterly Euro area data. I show that, besides shocks to the inflation target, also exogenous variations in money demand and bond supply can explain movements in long-term interest rates. I also find that taking into account the impact of bond yields on the macroeconomy generates superior in-sample and out-of-sample forecasts for output, inflation and for bond yields.

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  • Zagaglia, Paolo, 2009. "What Drives the Term Structure in the Euro Area? Evidence from a Model with Feedback," Research Papers in Economics 2009:12, Stockholm University, Department of Economics.
    • Handle: RePEc:hhs:sunrpe:2009_0012
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    Cited by:

    1. L. Marattin & P. Paesani & S. Salotti, 2011. "Fiscal shocks, public debt, and long-term interest rate dynamics," Working Papers wp740, Dipartimento Scienze Economiche, Universita' di Bologna.

    More about this item

    Keywords

    Monetary policy; yield curve; monetary transmission mechanism;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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