An Estimated DSGE Model: Explaining Variation in Term Premia
54 Pages Posted: 15 Dec 2011
Date Written: December 14, 2011
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
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