A Macroeconomic Approach to the Term Premium
IMF Working Papers, June 15, 2018
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- A Macroeconomic Approach to the Term Premium
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Bibliographic details
- Authors: Emanuel Kopp, Peter D. Williams
- Published: June 15, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484362150.001
Overview and Motivation
- Term premia have been very low and sometimes even negative in recent years.
- 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.
- An inflation surprise could require monetary policy to tighten faster than anticipated, inducing a sudden decompression of term and other risk premia and thus tightening financial conditions.
Methodology
- Proposes a semi-structural dynamic term structure model augmented with macroeconomic factors to include cyclical dynamics.
- Focus is on medium- to long-run forecasts.
Key Findings
- Term premium estimates are in line with those from other studies.
- The macroeconomic approach provides:
- Plausible, stable estimates of expected long-term interest rates.
- 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.
Subjects and Keywords (as provided)
- Subjects: Bonds, Financial institutions, Financial services, Inflation, Labor, Prices, Short term interest rates, Unemployment, Yield curve
- Keywords: Bonds, core PCE inflation series, hike cycle, Inflation, inflation expectation, inflation variable, interest rate expectation, interest rate forecast, New York Fed conduct, risk-free rate, Short term interest rates, State Space, term premium, term structure of interest rates, Unemployment, WP, yield curve
Content in this bundle
- A Macroeconomic Approach to the Term Premium, WP/18/140, June 2018