IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

News Shocks and the Term Structure of Interest Rates: A Challenge for DSGE Models

  • Christopher Otrok

    (University of Virginia)

  • Andre Kurmann

    (Universite du Quebec a Montreal and CIRPEE)

News shocks about future increases in Total Factor Productivity (TFP) lead to a large and persistent drop in inflation and the Federal Funds rate while driving up the slope of the term structure of interest rates (Kurmann and Otrok, 2010). In this paper, we first show that a monetary DSGE model with a standard parametrization along the lines of Smets and Wouters (2007) is unable to replicate these dynamics. We then formally estimate the model with a limited-information procedure that is designed to match as closely as possible the impulse responses of key macroeconomic aggregates, inflation and the term structure to TFP news shocks. When we restrict parameters to economically meaningful values, the model is unable to generate the large drop in inflation and the Federal Funds rate that causes the slope of the term structure to increase. This failure to quantitatively account for the impact of TFP news shocks represents a challenge for modern DSGE models because TFP news shocks explain a significant portion of the variation in inflation, the Federal Funds rate and the term structure of interest rate as well as medium-run fluctuations in future real activity.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://economicdynamics.org/meetpapers/2011/paper_426.pdf
Download Restriction: no

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 426.

as
in new window

Length:
Date of creation: 2011
Date of revision:
Handle: RePEc:red:sed011:426
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
Email:


More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed011:426. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.