[position in research by date]
[position in research by subject]
"Estimating Term Structure Equations Using Macroeconomic
Variables"
December 2007, submitted.
pdf file (97KB).
Abstract
This paper begins with the expectations theory of the term structure of
interest rates with constant term premia
and then postulates how expectations of future short term interest rates
are formed. Expectations depend in part on predictions from a set of
VAR equations and in part on the current and two lagged values of the
short term interest rate.
The results suggest that there is relevant independent
information in both the VAR equations' predictions
and the current and two lagged values of the short rate.
The model fits the long term interest rate data well,
including the 2004-2006 period, which some have found a puzzle.
The properties of the model are consistent with the response of the
long term U.S. Treasury bond rate to surprise price and employment
announcements.
The overall results suggest that long term
rates can be fairly well explained by modeling expectation formation of
future short term rates.
Comments