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

See all articles by Martin M. Andreasen

Martin M. Andreasen

Aarhus University; CREATES, Aarhus University

Date Written: February 23, 2011

Abstract

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

Andreasen, Martin M., Explaining Macroeconomic and Term Structure Dynamics Jointly in a Non-Linear DSGE Model (February 23, 2011). CREATES Research Paper No. 2008-43, Available at SSRN: https://ssrn.com/abstract=1262201 or http://dx.doi.org/10.2139/ssrn.1262201

Martin M. Andreasen (Contact Author)

Aarhus University ( email )

Aarhus
Denmark

CREATES, Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

HOME PAGE: http://econ.au.dk/research/research-centres/creates/people/junior-fellows/martin-andreasen/

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