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Activity Number:
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415
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Type:
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Contributed
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Date/Time:
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Wednesday, August 5, 2009 : 8:30 AM to 10:20 AM
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Sponsor:
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Business and Economic Statistics Section
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| Abstract - #303563 |
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Title:
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Long-Run Risks in the Term Structure of Interest Rates: Estimation
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Author(s):
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Taeyoung Doh*+
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Companies:
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Federal Reserve Bank of Kansas City
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Address:
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One Memorial Drive, Kansas City, MO, 64198,
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Keywords:
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Long Run RIsks ; Bayesian Econometrics ; Term Structure of Interest Rates
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Abstract:
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This paper specifies and estimates a long-run risks model with inflation by using the nominal term structure data in the United States from 1953 to 2006. The negative correlation between expected inflation and expected consumption growth in conjunction with the Epstein-Zin (1989) recursive preferences fits the yield curve data better than the alternative specifications. However, the variations of the forward looking components of consumption growth and inflation in the estimated model are much smaller than implied by calibrated parameter values in the previous literature. An extended model with time varying volatilities alleviates this problem. In the extended model, estimated long run risks and volatilities, especially for inflation, are in line with survey data and the estimated inflation volatility explains a significant portion of the time variation of the term premium.
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