An Estimated New Keynesian Model and the Term Structure of Interest Rates

Download or read book An Estimated New Keynesian Model and the Term Structure of Interest Rates written by and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this thesis, a New Keynesian Model is jointly estimated with an affine no-arbitrage specification of the term structure of interest rates. We investigate how important inflation, output and monetary policy shocks are as a source of interest rate fluctuations. Our approach is to interpret inflation and output as linear combinations of yields. This allows us to employ novel techniques from the term structure literature that facilitate the estimation of our joint model. Using US data from 1961Q1 to 2014Q2, we suggest that inflation and the output gap account for around 80% of the unconditional forecast variance of bond yields at the short and medium end of the term structure, while monetary policy shocks account for around 20%. Impulse responses suggest that bond yields respond to macro shocks only after a few quarters. This is due to the substantial monetary policy inertia in our model. At the peak of the response, inflation shocks increase bond yields by more than one-to-one, but output shocks by less than one-to-one. Finally, the estimated time-varying term premium is strongly countercyclical and we show that it allows us to capture salient features of the term structure that constitute a puzzle in the expectations hypothesis.