Working Paper: CEPR ID: DP4835
Authors: Richard Clarida; Lucio Sarno; Mark P. Taylor; Giorgio Valente
Abstract: We examine the relationship between interest rates of different maturities for the US, Germany and Japan over the period 1982-2000, using a general, multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts. This approach has a very general underlying theoretical rationale that allows for time-varying term premia and other short-run deviations from the expectations model of the term structure. The resulting non-linear models provide good in-sample fits, display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out-of-sample forecasting properties.
Keywords: forecasting; Markov switching; term structure of interest rates
JEL Codes: E43; E47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regime shifts and asymmetries (P39) | better fit for the data (C52) |
| long-run equilibrium relationship (D59) | rejection of traditional models (B52) |
| inclusion of asymmetries (F12) | enhances out-of-sample forecasting performance (C53) |
| regime-switching probabilities (C22) | related to key state variables (C32) |
| key state variables (C39) | significant for monetary policy decisions (E52) |