A Joint Characterization of German Monetary Policy and the Dynamics of the German Term Structure of Interest Rates

The paper develops an empirical no-arbitrage Gaussian affine term structure model to explain the dynamics of the German term structure of interest rates. In contrast to most affine term structure models two risk factors are linked to observable macroeconomics factors: output and inflation. The results indicate that the dynamics of the German term structure of interest rates can be sufficiently explained by expected variations in those macroeconomic factors plus an additional unobservable factor. Furthermore, we are able to extract a monetary policy reaction function within this no-arbitrage model that closely resembles empirical reaction functions that are based on the dynamics of the short rate only.


Issue Date:
2008
Publication Type:
Journal Article
PURL Identifier:
http://purl.umn.edu/50005
Published in:
Review of Applied Economics, Volume 04, Number 1-2
Page range:
45-63
Total Pages:
19
JEL Codes:
E43; E58; G12




 Record created 2017-04-01, last modified 2017-04-27

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