BESS at MNB April 29, 2009 Hans Dewachter: Bayesian Estimation of Extended Macro-Finance Models: The Role of Financial and Macroeconomic Shocks in Yield Curve Dynamics (joint with Leonardo Iania)

The seminar will be held in the Visitor Centre at 3:15 pm

Hans Dewachter (CES, University of Leuven, Belgium)

Abstract

In this paper we estimate an extended Macro-Finance model embedding as special cases the current benchmark Macro-Finance models and additionally allowing for time variation in the long-run real rate, liquidity shocks and an independent risk premium factor. The model is estimated onUS data using MCMC techniques. We find that the extended model outperforms significantly most standard yield curve models in terms of cross-sectional .t of the yield curve. In particular, the model outperforms benchmark (structural and semi-structural) Macro-Finance models as well as standard A0(3) Finance models. Three findings stand out. First, a substantial fraction of the variation in long-term yields is attributed to changes in the equilibrium real rate. Second, liquidity shocks have statistically and economically significant impact on the yield curve. Finally, historical decompositions show that the extended Macro-Finance model replicates accurately the US yield curve dynamics over the period 1960-2008.

paper