A joint model for the term structure of interest rates and the macroeconomy

Dewachter, Hans; Lyrio, Marco; Maes, Konstantijn

doi:10.1002/jae.848

Cited by 53 publications

(18 citation statements)

References 32 publications

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“…Going further back in time, and taking a more global perspective, it is hard to believe that the link found between lower US policy rates and higher capital flows to emerging market economies does not reflect, at least to some degree, an effect on higher risk-taking (Clark and Berko, 1997). And, fast forwarding again, the very recent budding literature of macro-finance models of the term structure finds some evidence of a positive effect between (unanticipated) declines in policy rates and lower term premia (Bernanke and Kuttner, 2005;Dewachter et al, 2006;Palomino, 2007;Rudebusch et al, 2007). 27…”

Section: Blum (2008)mentioning

confidence: 92%

Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?

Borio

Zhu²

2012

Journal of Financial Stability

980

277

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a b s t r a c tFew areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents-what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risktaking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.

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Section: Blum (2008)mentioning

confidence: 92%

Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?

Borio

Zhu²

2012

Journal of Financial Stability

980

277

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“…Many studies have been conducted on yield curve models and on the subclass of affine term structure models. Among them, the following works are most relevant to this paper: Ang and Piazzesi (2003), Ang, Dong, and Piazzesi (2007), Bikbov and Chernov (2006), , Dewacher, Lyrio, and Maes (2006), Duffee (2006Duffee ( , 2007, Vestin (2006, 2007), and Wu (2004, 2007) all of which include macro factors as well as latent factors in their "macro-finance" affine term structure models. Kim (2007), meanwhile, discusses various challenges in the specification and implementation of "macro-finance" models.…”

Section: Introductionmentioning

confidence: 99%

Foreign Bond Investment and the Yield Curve*

Suh

2009

Asia-Pacific Journal of Financial Studies

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This is one of the seven accepted papers among 76 papers that were submitted to the solicitation by Asia-Pacific Journal of Financial Studies in the special "Call-for-Papers" event in 2008. AbstractMarket participants have argued that the yield curve in the Korean bond market has been increasingly flattened since 2007 caused partly by foreign investors' rapidly growing investment in Korean bond market, motivated to take advantage of market imperfections seeking riskless profit making opportunities. To analyze how much foreign bond investments have affected the bond yields in Korea, in this paper I utilize a stylized affine term structure model that has an observable factor related with foreign bond investments as well as latent factors. I find supportive evidence for the argument by market participants that investment by foreigners has been an important factor behind the flattening of the yield curve since 2007. Taking out the effects of foreign bond investment on the yields, I observe much a weakened yield flattening phenomenon.

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“…Tables 3a and 3b 26 Buraschi and Jiltsov (2005) report positive term premiums for inflation, with larger premiums for longer maturities. Dewachter, Lyrio, and Maes (2006) estimate positive term premiums for inflation that rise with maturity and negligible term premiums for GDP gaps. Positive term premiums are also estimated for a time-varying central tendency for inflation, similar toπt; these premiums also rise with maturity and are nearly triple the size of the term premiums for inflation.…”

Section: Forward Rate Regressionsmentioning

confidence: 97%

“…16 In the model of section 3, term premiums of bond rates were assumed to be constant over time and drop out of equilibrium deviations. 17 Recent examples of empirical estimates of the term structure exploring macro variable determinants of term premiums include Ang and Piazzesi (2003), Rudebusch and Wu (2007, forthcoming), Ang, Dong, and Piazzesi (2005), Duffee (2006), Dewachter and Lyrio (2006a), and Dewachter, Lyrio, and Maes (2006). is equal to the expected policy rate in the ith period, r t,i , plus a possibly time-varying forward rate term premium, ψ t,i .…”

Section: No-arbitrage Bond Pricing With Time-varying Risk Premiums Anmentioning

confidence: 99%

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Term structure transmission of monetary policy

Kozicki¹,

Tinsley²

2008

The North American Journal of Economics and Finance

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Abstract:Under bond rate transmission of monetary policy, standard restrictions on policy responses to obtain determinate inflation need not apply. In periods of passive policy, bond rates may exhibit stable responses to inflation if future policy is anticipated to be active, or if time-varying term premiums incorporate inflation-dependent risk pricing. We derive a generalized Taylor Principle that requires a lower bound to the average anticipated path of forward rate responses to inflation. We also present a no-arbitrage term structure model with horizon-dependent policy and time-varying term premiums to explain mechanics and provide empirical results supporting these channels.

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A joint model for the term structure of interest rates and the macroeconomy

Cited by 53 publications

References 32 publications

Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?

Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?

Foreign Bond Investment and the Yield Curve*

Term structure transmission of monetary policy

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