Resource title

Towards a Joint Characterization of Monetary Policy and the Dynamics of the Term Structure of Interest Rates

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Resource description

The paper develops an empirical no-arbitrage Gaussian affine term structure model to explain the dynamics of the German term structure of interest rates from 1979 through 1998. In contrast to most affine term structure models two risk factors that drive the dynamics are linked to observable macroeconomics factors: output and inflation. The results obtained by a Kalman-filter-based maximum likelihood procedure indicate that the dynamics of the German term structure of interest rates can be sufficiently explained by expected variations in those macroeconomic factors plus an additional unobservable factor. Furthermore, we are able to extract a monetary policy reaction function within this no-arbitrage model of the term structure that closely resembles the empirical reaction functions that are based on the dynamics of the short rate only.

Resource author

Ralf Fendel

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/19491

Resource license

Adapt according to the presented license agreement and reference the original author.