A Macroeconomic Approach to the Term Premium

Author/Editor:

Emanuel Kopp ; Peter D. Williams

Publication Date:

June 15, 2018

Electronic Access:

Free Full Text. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

In recent years, term premia have been very low and sometimes even negative. Now, with the United States economy growing above potential, inflationary pressures are on the rise. Term premia are very sensitive to the expected future path of growth, inflation, and monetary policy, and an inflation surprise could require monetary policy to tighten faster than anticipated, inducing to a sudden decompression of term and other risk premia, thus tightening financial conditions. This paper proposes a semi-structural dynamic term structure model augmented with macroeconomic factors to include cyclical dynamics with a focus on medium- to long-run forecasts. Our results clearly show that a macroeconomic approach is warranted: While term premium estimates are in line with those from other studies, we provide (i) plausible, stable estimates of expected long-term interest rates and (ii) forecasts of short- and long-term interest rates as well as cyclical macroeconomic variables that are stunningly close to those generated from large-scale macroeconomic models.

Series:

Working Paper No. 18/140

Subject:

English

Publication Date:

June 15, 2018

ISBN/ISSN:

9781484362150/1018-5941

Stock No:

WPIEA2018140

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

22

Please address any questions about this title to publications@imf.org