Evaluating the interplay of term premia, monetary policy, and the economy in the euro area
Loading...
Date
2015
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
This paper investigates the interplay of term premia,
monetary policy, and the economy in the euro zone. For
this purpose I use a no-arbitrage macro-finance model
of the term structure of government bond yields as in
Ireland (2015), where yields are modeled as linear-affine
functions of the state vector. Movements in term premia
are captured by an unobservable risk variable. Restric-
tions on the dynamic of the state equation are entailed
in order to identify the structural model. The model
is estimated using Bayesian estimation techniques. The
results highlight a rich dynamic between term premia,
monetary policy, and the economy. In line with the
"practitioners view" I find that an exogenous rise in pre-
mia dampens economic activity. Moreover, during the
sample period, the ECB lowered the nominal short-term
interest rate in response to a rise in term premia.