Estimating a Structural Macro Finance Model of Term Structure

This paper aims to estimate a structural macro finance model of term strucuture based on the approximate solution of a standard dynamic general equilibrium model with nominal rigidities. To capture the nonlinearity that can contribute to a more precise analysis of the dynamics of macro variables and the yield curve, we apply a second order approximation of the equilibrium conditions to solve the model. New closed-form solutions for bond yields are proposed to make estimation practically feasible. We estimate the model based on US data by Bayesian methods. Our results provide clear macroeconomic interpretations of term structure factors such as level, slope, and curvature. Also, our analysis favors the explanation that the downward trend of the level of the yield curve and term premia after the early 1980s is primarily related with changes in monetary policy. However, the impact of the Volcker disinflation policy on this decline is found to be delayed.

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