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Filtering Long-Run Inflation Expectations with a Structural Macro Model of the Yield Curve

Author

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  • Marco Lyrio
  • Hans Dewachter

Abstract

This paper proposes a methodolgy to estimate structural macroeconomic models including non-stationary steady state dynamics. Using a transitory-permanent decomposition of the Euler equations, the method first solves for the transitory dynamics and subsequently provides the solution for the full model by substituting back in the steady state dynamics. The method is applied to models linking the macroeconomic dynamics to the term structure of interest rates. We find that non-stationary variables play a crucial role in this respect. More specifically, long-run inflation expectations, estimated on the macroeconomic variables, turn out to be extremely important in the determination of the term structure

Suggested Citation

  • Marco Lyrio & Hans Dewachter, 2004. "Filtering Long-Run Inflation Expectations with a Structural Macro Model of the Yield Curve," Computing in Economics and Finance 2004 188, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:188
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    File URL: http://repec.org/sce2004/up.22078.1077877675.pdf
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    References listed on IDEAS

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    Cited by:

    1. Gavin, William T. & Kydland, Finn E. & Pakko, Michael R., 2007. "Monetary policy, taxes, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1587-1611, September.

    More about this item

    Keywords

    Structural model; New-Keynesian model; filtering procedure; essentially affine term structure model; time-varying inflation expectations;

    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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