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Fisher's Relation and the Term Structure: Implications for IS Curves

Malikane, Christopher and Ojah, Kalu (2014): Fisher's Relation and the Term Structure: Implications for IS Curves.

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Abstract

We derive the new Keynesian IS curve from the Fisher relation and the expectations theory of the term structure, without reference to household preferences. We show that, under certain conditions, parameters of the empirical new Keynesian IS curves need not be estimated but can be calibrated from observed data. We specifically show that the coefficient of relative risk aversion is the steady-state consumption-output ratio and that the interest rate effect on output can be reasonably approximated by the inverse of the average term to maturity of debt instruments. We highlight the implications of these findings for macroeconomic modelling and estimation.

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