Term Structure Modeling, Forecasting and Implications for Monetary Policy

Download or read book Term Structure Modeling, Forecasting and Implications for Monetary Policy written by Chamadanai Marknual and published by . This book was released on 2015 with total page 260 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis examines the macro-finance-fiscal term structure model to incorporate fiscal instability variables and the term spread to understand the impact of the sovereign debt crisis on the evolution of the yield curve. My findings reveal financial instability increases the term spread associated with the expectation of higher sovereign default risk and consequently signals economic agents to reduce their spending, and thus worsens economic activity. Secondly, I also investigate whether the dynamic factor model with nonparametric factor loadings is more accurate relative to other term structure models by employing the dynamic semi-parametric factor model (DSFM). The empirical results indicate that a better in-sample fit is provided by the dynamic semiparametric factor model. However, the overall forecasting results are not encouraging. The dynamic semiparametric factor model provides accurate results in forecasting a persistent trend while the dynamic Nelson-Siegel model is more suitable to fit more volatile series. Thirdly,I use a Sheen-Trueck-Wang business conditions index for term structure modeling and forecasting. I find the cross-sectional yield provides guidance to anchor the yield in the next period. The prediction performance of the model is enhancedby using the index since it includes information on frequently released or more recent available data. The index is significantly related to the slope factor, which suggests the forward-looking information from the index inuences the adjustmentthe in the yield slope. Lastly, I examine the effectiveness of the US quantitative easing (QE) policy with a Bayesian structural vector auto regressive (B-SVAR)model with sign restrictions. I find the transmission mechanism of the Federal Reserve asset purchase effectively expands output and avert deflation through a compression in the yield spread.