An Estimated DSGE Model: Explaining Variation in Term Premia

54 Pages Posted: 15 Dec 2011

See all articles by Martin M. Andreasen

Martin M. Andreasen

Aarhus University; CREATES, Aarhus University

Date Written: December 14, 2011

Abstract

This paper develops a DSGE model which explains variation in the nominal and real term structure along with inflation surveys and four macro variables in the UK economy. The model is estimated based on a third-order approximation to allow for time-varying term premia. We find a fall in nominal term premia during the 1990s which mainly is due to lower inflation risk premia. A structural decomposition further shows that this fall is driven by negative preference shocks, lower fixed production costs, and positive investment shocks.

Keywords: market price of risk, non-linear filtering, quantity of risk, Epstein-Zin-Weil preferences, third-order perturbation

JEL Classification: C51, E10, E32, E43, E44

Suggested Citation

Andreasen, Martin M., An Estimated DSGE Model: Explaining Variation in Term Premia (December 14, 2011). Bank of England Working Paper No. 441, Available at SSRN: https://ssrn.com/abstract=1972911 or http://dx.doi.org/10.2139/ssrn.1972911

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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