Explaining Macroeconomic and Term Structure Dynamics Jointly in a Non-Linear DSGE Model
CREATES Research Paper No. 2008-43
35 Pages Posted: 2 Sep 2008 Last revised: 25 Feb 2011
Date Written: February 23, 2011
This paper considers a New Keynesian DSGE model with Epstein-Zin-Weil preferences combined with real and nominal long-run risk. The model is solved up to third order and estimated on US data using the 10-year nominal yield curve, two interest rate surveys, and four macro variables. Our model performs well in terms of matching the data and generates a realistic 10-year nominal term premium with the same pattern as found in many reduced-form models. We use the model for a structural decomposition of the 10-year nominal term premium from 1966-2007 in order to explain what caused the high level of term premium in 1980 and the low level around 2005.
Keywords: Epstein-Zin-Weil preferences, Habits, Long-run risk, Non-linear filtering, Time-varying term premia
JEL Classification: E10, E32, E43, E44
Suggested Citation: Suggested Citation