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A Macro-Finance Model of the Term Structure, Monetary Policy, and the Economy

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Author Info
Tao Wu
Glenn Rudebusch

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Abstract

This paper develops and estimates a macro-finance model that combines a canonical affine no-arbitrage finance specification of the term structure with standard macroeconomic aggregate relationships for output and inflation. From this new empirical formulation, we obtain several important results: (1) the latent term structure factors from finance no-arbitrage models appear to have important macroeconomic and monetary policy underpinnings, (2) there is no evidence of monetary policy inertia or a slow partial adjustment of the policy interest rate by the Federal Reserve, and (3) both forward-looking and backward-looking elements play important roles in macroeconomic dynamics

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 104.

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Date of creation: 2004
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Handle: RePEc:red:sed004:104

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Related research
Keywords: Term Structure; Monetary Policy;

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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  7. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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