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Macroeconomic Models and the Yield Curve

  • Jagjit Chadha

    ()

    (Brunel University and BNP Paribas)

  • Sean Holly

    (Cambridge University)

Many have questioned the empirical relevance of the Calvo-Yun model. This paper appends three widely-studied macroeconomic models (Calvo-Yun, Hybrid and Svensson) with forward rate curves. We back out from observations on the yield curve the underlying macroeconomic model that most closely matches the level, slope and curvature of the yield curve. With each model we trace the response of the yield curve to macroeconomic shocks. We assess the fit of each model with the observed behaviour in forward rates. We find limited support for Calvo-Yun model in terms of fit with the observed yield curve but we find some support for each of the Hybrid and Svensson models. We conclude that macroeconomic persistence seems to be priced into the yield curve

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 105.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:105
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