Estimating a Structural Macro Finance Model of Term Structure

This paper aims to estimate a structural macro finance model of term structure based on the approximate solution of a standard dynamic general equilibrium model with nominal rigidities. To capture the nonlinearity and time varying volatilities which can contribute to the realistic dynamics of the yield curve, we apply the second order approximation for solving the equilibrium model and obtain close-form solutions for bond prices. The resulting nonlinear state space model representation is taken to US data and estimated by Bayesian MCMC methods. Our estimation results provide clear macroeconomic interpretations of term structure factors such as level, slope, and curvature. Our analysis favor the explanation that the downward trend of the level of the yield curve and bond risk premia after the early 1980s is primarily related with changes in monetary policy.

For more information, contact Cristina Fuentes-Albero.