Macro Factors and the Term Structure of Interest Rates

24 Pages Posted: 24 Mar 2003

See all articles by Hans Dewachter

Hans Dewachter

Catholic University of Leuven (KUL) - Department of Economics; Erasmus Research Institute of Management (ERIM)

Marco Lyrio

Insper Institute of Education and Research

Date Written: January 2004

Abstract

This paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long-run expectations. The model extends the approach pioneered by Kozicki and Tinsley (2001) by modeling consistently long-run inflation expectations simultaneously with the term structure. Application to the U.S. economy shows the importance of long-run inflation expectations in the modeling of long-term bond yields. The paper also provides a macroeconomic interpretation for the latent factors found in standard finance models of the yield curve: the "level" factor represents the long-run inflation expectation of agents; the "slope" factor captures business cycle conditions; and the "curvature" factor expresses a clear independent monetary policy factor.

Keywords: Essentially affine term structure model, macroeconomic factors, long-run market expectations, monetary policy rule

JEL Classification: M, M41, G3, E43, E44, E52

Suggested Citation

Dewachter, Hans and Lyrio, Marco, Macro Factors and the Term Structure of Interest Rates (January 2004). Available at SSRN: https://ssrn.com/abstract=385703 or http://dx.doi.org/10.2139/ssrn.385703

Hans Dewachter (Contact Author)

Catholic University of Leuven (KUL) - Department of Economics ( email )

Center for Economic Studies
Naamsestraat 69
Leuven, B-3000
Belgium
+0032 16 326859 (Phone)
+0032 16 326796 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Marco Lyrio

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

HOME PAGE: http://www.insper.edu.br/en/faculty-and-research/marco-lyrio

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