Dewachter, Hans and Iania, Leonardo and Lyrio, Marco (2011): A NewKeynesian model of the yield curve with learning dynamics: A Bayesian evaluation.

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Abstract
We estimate a NewKeynesian macrofinance model of the yield curve incorporating learning by private agents with respect to the longrun expectation of inflation and the equilibrium real interest rate. A preliminary analysis shows that some liquidity premia, expressed as some degree of mispricing relative to noarbitrage restrictions, and time variation in the prices of risk are important features of the data. These features are, therefore, included in our learning model. The model is estimated on U.S. data using Bayesian techniques. The learning model succeeds in explaining the yield curve movements in terms of macroeconomic shocks. The results also show that the introduction of a learning dynamics is not sufficient to explain the rejection of the extended expectations hypothesis. The learning mechanism, however, reveals some interesting points. We observe an important difference between the estimated inflation target of the central bank and the perceived longrun inflation expectation of private agents, implying the latter were weakly anchored. This is especially the case for the period from mid1970s to mid1990s. The learning model also allows a new interpretation of the standard level, slope, and curvature factors based on macroeconomic variables. In line with standard macrofinance models, the slope and curvature factors are mainly driven by exogenous monetary policy shocks. Most of the variation in the level factor, however, is due to shocks to the outputneutral real rate, in contrast to the mentioned literature which attributes most of its variation to longrun inflation expectations.
Item Type:  MPRA Paper 

Original Title:  A NewKeynesian model of the yield curve with learning dynamics: A Bayesian evaluation 
Language:  English 
Keywords:  NewKeynesian model; Affine yield curve model; Learning; Bayesian estimation 
Subjects:  E  Macroeconomics and Monetary Economics > E4  Money and Interest Rates > E43  Interest Rates: Determination, Term Structure, and Effects E  Macroeconomics and Monetary Economics > E5  Monetary Policy, Central Banking, and the Supply of Money and Credit > E52  Monetary Policy E  Macroeconomics and Monetary Economics > E4  Money and Interest Rates > E44  Financial Markets and the Macroeconomy 
Item ID:  34461 
Depositing User:  Marco Lyrio 
Date Deposited:  02. Nov 2011 14:15 
Last Modified:  12. Feb 2013 21:10 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/34461 