For helpful comments, we thank participants at the 2004 FRBSF-Stanford conference on ‘Interest Rates and Monetary Policy’, the FRB Cleveland term structure workshop, and the NBER Summer Institute, as well as many colleagues in the Federal Reserve System and Greg Duffee, Bennett McCallum, Oreste Tristani, Peter Tinsley and Hans Dewachter. Vuong Nguyen provided excellent research assistance. The views expressed in this article do not necessarily reflect those of others in the Federal Reserve System.
A Macro-Finance Model of the Term Structure, Monetary Policy and the Economy*
Article first published online: 28 JUN 2008
© The Author(s). Journal compilation © Royal Economic Society 2008
The Economic Journal
Volume 118, Issue 530, pages 906–926, July 2008
How to Cite
Rudebusch, G. D. and Wu, T. (2008), A Macro-Finance Model of the Term Structure, Monetary Policy and the Economy. The Economic Journal, 118: 906–926. doi: 10.1111/j.1468-0297.2008.02155.x
- Issue published online: 28 JUN 2008
- Article first published online: 28 JUN 2008
- Submitted: 27 September 2005 Accepted: 7 June 2007
This article develops and estimates a macro-finance model that combines a canonical affine no-arbitrage finance specification of the term structure of interest rates with standard macroeconomic aggregate relationships for output and inflation. Based on this combination of yield curve and macroeconomic structure and data, we obtain several interesting results: (1) the latent term structure factors from no-arbitrage finance models appear to have important macroeconomic and monetary policy underpinnings, (2) there is no evidence of a slow partial adjustment of the policy interest rate by the central bank, and (3) both forward-looking and backward-looking elements play roles in macroeconomic dynamics.