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An estimated DSGE model: Explaining variation in nominal term premia, real term premia, and inflation risk premia

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  • Andreasen, Martin M.

Abstract

This paper develops a DSGE model which is shown to explain variation in the nominal and real term structure as well as inflation surveys and four macrovariables for the UK economy. The model is estimated based on a third-order approximation to allow for time-varying term premia. We find a fall in nominal term premia during the 1990s which mainly is caused by lower inflation risk premia. A structural decomposition further shows that this fall is driven by negative preference shocks, lower fixed production costs, positive investment shocks, and a more aggressive response to inflation by the Bank of England.

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  • Andreasen, Martin M., 2012. "An estimated DSGE model: Explaining variation in nominal term premia, real term premia, and inflation risk premia," European Economic Review, Elsevier, vol. 56(8), pages 1656-1674.
    • Handle: RePEc:eee:eecrev:v:56:y:2012:i:8:p:1656-1674
    DOI: 10.1016/j.euroecorev.2012.09.006
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    More about this item

    Keywords

    Market price of risk; Non-linear filtering; Quantity of risk; Epstein–Zin–Weil preferences; Third-order perturbation;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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