Working Paper: NBER ID: w11340
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 an unobservable time-varying inflation target and the natural rate of output which are filtered from macro and term structure data. We obtain 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 the monetary policy shocks dominate the variation in the "slope and curvature factors".
Keywords: New Keynesian; Term Structure; Macroeconomics
JEL Codes: E4; E5; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Macroeconomic variables Granger causing term spreads (E43) | Mixed relationship between term spreads and macro variables (E43) |
| Incorporating term structure information into the New Keynesian model (E43) | Significant estimates of the Phillips curve and real interest rate response parameters (E43) |
| Inflation target (E31) | Level factor in the term structure (E43) |
| Monetary policy shocks (E39) | Slope and curvature factors (C29) |
| Natural rate of output extracted from observable macro and term structure variables (E23) | Critical role in the monetary transmission mechanism (E52) |
| Inflation target shock (E31) | Significant impact on inflation dynamics (E31) |
| Macroeconomic shocks (E39) | Strong contemporaneous responses of the entire term structure (E43) |