Working Paper: CEPR ID: DP5956
Authors: Geert Bekaert; Seonghoon Cho; Antonio Moreno
Abstract: This article complements the structural New-Keynesian macro framework with a no-arbitrage affine term structure model. Whereas our methodology is general, we focus on an extended macro-model with unobservable processes for the inflation target and the natural rate of output which are filtered from macro and term structure data. We find that term structure information helps generate large and significant estimates of the Phillips curve and real interest rate response parameters. Our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks. The inflation target dominates the variation in the 'level factor' whereas monetary policy shocks dominate the variation in the 'slope and curvature factors'.
Keywords: Inflation Target; Monetary Policy; Phillips Curve; Term Structure of Interest Rates
JEL Codes: E31; E32; E43; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| term structure data (Y10) | improved parameter estimates (C51) |
| inflation target (E31) | variation in level factor (C29) |
| monetary policy shocks (E39) | slope and curvature factors of the term structure (C50) |
| macroeconomic shocks (F41) | term structure (E43) |
| unobservable variables (C29) | endogenous persistence in the model (O41) |
| endogenous persistence in the model (O41) | dynamics of inflation and output (E31) |