This paper presents an essentially affine model of the term structure of interest rates making us... more This paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long-run expectations. The model extends the approach pioneered by Kozicki and Tinsley (2001) by modelling consistently long-run inflation expectations simultaneously with the term structure. This model thus avoids the standard pre-filtering of long-run expectations, as proposed by Kozicki and
This paper proposes a methodolgy to estimate structural macroeconomic models including non-statio... more This paper proposes a methodolgy to estimate structural macroeconomic models including non-stationary steady state dynamics. Using a transitory-permanent decomposition of the Euler equations, the method first solves for the transitory dynamics and subsequently provides the solution for the full model by substituting back in the steady state dynamics. The method is applied to models linking the macroeconomic dynamics to the term structure of interest rates. We find that non-stationary variables play a crucial role in this respect. More specifically, long-run inflation expectations, estimated on the macroeconomic variables, turn out to be extremely important in the determination of the term structure
this paper about how the exchange rates are determined has a number of implications. It should be... more this paper about how the exchange rates are determined has a number of implications. It should be stressed that much of the discussion that follows is speculative, as the main hypothesis requires further testing. Nevertheless it is interesting to speculate about the possible implications of a theory that puts great emphasis on agents' beliefs. We will look first into the implications for monetary policies in general and then for foreign exchange market interventions. This analysis will also lead to some thoughts about the future evolution of the euro-dollar exchange rate
In this paper we solve a particular type of stochastic process switching problem where the date o... more In this paper we solve a particular type of stochastic process switching problem where the date of switching is fixed and known but the terminal price may depend on past prices. We derive closed-form solutions for the price dynamics of the asset before the terminal date and deduce the variance and jump components of these dynamics at the announcement. We subsequently extend the model to price dynamics prior to the announcement of the regime switch assuming that markets may have some expectations regarding the occurrence and/or the type of the regime switch. Finally, we apply the general model to discuss the implications of the chosen conversion modalities in the European Monetary Union (EMU) conversion procedure.
This paper proposes a methodology to estimate structural macroeconomic models including stochasti... more This paper proposes a methodology to estimate structural macroeconomic models including stochastic endpoints. Using a transitory-permanent decomposition of the Euler equations, the method first solves for the transitory dynamics and subsequently provides the solution for the full model by substituting back in the steady state dynamics. The method is applied to models linking the macroeconomic dynamics to the term structure of interest rates. We find that non-stationary variables play a crucial role in this respect. More specifically, long-run inflation expectations, filtered from macroeconomic variables, turn out to be extremely important in the determination of the term structure.. We are grateful for financial support from the FWO-Vlaanderen (Project No.:G.0332.01). We thank Konstantijn Maes, Raf Wouters, and seminar participants at the National Bank of Belgium, the 2004 Conference on Computing in Economics and Finance, and the Heriot-Watt University for helpful comments. The auth...
ABSTRACT We revisit the common practice of using yield spreads to forecast inflation. We address ... more ABSTRACT We revisit the common practice of using yield spreads to forecast inflation. We address two main issues. First, we assess the importance of decomposing yield spreads into an expectations and a term premium component in order to predict inflation. Second, we quantify the impact of financial shocks in the dynamics of each of these components. The yield spread decomposition is achieved with the use of a no-arbitrage macro- finance model incorporating both macroeconomic and financial factors. The model is applied to the U.S. economy and estimated with Bayesian techniques. We find that the yield spread decomposition is crucial to forecast inflation for most forecasting horizons. Also, the inclusion of control variables such as the short-term interest rate and lagged dependent variable does not drive out the predictive power of the yield spread decomposition.
This paper presents an essentially affine model of the term structure of interest rates making us... more This paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long-run expectations. The model extends the approach pioneered by Kozicki and Tinsley (2001) by modelling consistently long-run inflation expectations simultaneously with the term structure. This model thus avoids the standard pre-filtering of long-run expectations, as proposed by Kozicki and
This paper proposes a methodolgy to estimate structural macroeconomic models including non-statio... more This paper proposes a methodolgy to estimate structural macroeconomic models including non-stationary steady state dynamics. Using a transitory-permanent decomposition of the Euler equations, the method first solves for the transitory dynamics and subsequently provides the solution for the full model by substituting back in the steady state dynamics. The method is applied to models linking the macroeconomic dynamics to the term structure of interest rates. We find that non-stationary variables play a crucial role in this respect. More specifically, long-run inflation expectations, estimated on the macroeconomic variables, turn out to be extremely important in the determination of the term structure
this paper about how the exchange rates are determined has a number of implications. It should be... more this paper about how the exchange rates are determined has a number of implications. It should be stressed that much of the discussion that follows is speculative, as the main hypothesis requires further testing. Nevertheless it is interesting to speculate about the possible implications of a theory that puts great emphasis on agents' beliefs. We will look first into the implications for monetary policies in general and then for foreign exchange market interventions. This analysis will also lead to some thoughts about the future evolution of the euro-dollar exchange rate
In this paper we solve a particular type of stochastic process switching problem where the date o... more In this paper we solve a particular type of stochastic process switching problem where the date of switching is fixed and known but the terminal price may depend on past prices. We derive closed-form solutions for the price dynamics of the asset before the terminal date and deduce the variance and jump components of these dynamics at the announcement. We subsequently extend the model to price dynamics prior to the announcement of the regime switch assuming that markets may have some expectations regarding the occurrence and/or the type of the regime switch. Finally, we apply the general model to discuss the implications of the chosen conversion modalities in the European Monetary Union (EMU) conversion procedure.
This paper proposes a methodology to estimate structural macroeconomic models including stochasti... more This paper proposes a methodology to estimate structural macroeconomic models including stochastic endpoints. Using a transitory-permanent decomposition of the Euler equations, the method first solves for the transitory dynamics and subsequently provides the solution for the full model by substituting back in the steady state dynamics. The method is applied to models linking the macroeconomic dynamics to the term structure of interest rates. We find that non-stationary variables play a crucial role in this respect. More specifically, long-run inflation expectations, filtered from macroeconomic variables, turn out to be extremely important in the determination of the term structure.. We are grateful for financial support from the FWO-Vlaanderen (Project No.:G.0332.01). We thank Konstantijn Maes, Raf Wouters, and seminar participants at the National Bank of Belgium, the 2004 Conference on Computing in Economics and Finance, and the Heriot-Watt University for helpful comments. The auth...
ABSTRACT We revisit the common practice of using yield spreads to forecast inflation. We address ... more ABSTRACT We revisit the common practice of using yield spreads to forecast inflation. We address two main issues. First, we assess the importance of decomposing yield spreads into an expectations and a term premium component in order to predict inflation. Second, we quantify the impact of financial shocks in the dynamics of each of these components. The yield spread decomposition is achieved with the use of a no-arbitrage macro- finance model incorporating both macroeconomic and financial factors. The model is applied to the U.S. economy and estimated with Bayesian techniques. We find that the yield spread decomposition is crucial to forecast inflation for most forecasting horizons. Also, the inclusion of control variables such as the short-term interest rate and lagged dependent variable does not drive out the predictive power of the yield spread decomposition.
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Papers by Hans Dewachter