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

Author

Listed:
  • Jules H. van Binsbergen

    (Graduate School of Business, Stanford University)

  • Jesús Fernández-Villaverde

    (Department of Economics, University of Pennsylvania)

  • Ralph S.J. Koijen

    (Booth School of Business, University of Chicago)

  • Juan F. Rubio-Ramírez

    (Department of Economics, Duke University)

Abstract

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.

Suggested Citation

  • Jules H. van Binsbergen & Jesús Fernández-Villaverde & Ralph S.J. Koijen & Juan F. Rubio-Ramírez, 2010. "The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences," PIER Working Paper Archive 10-011, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:10-011
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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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