Skip to main content Accessibility help
×
Home

AN ESTIMATED DSGE MODEL WITH LEARNING BASED ON TERM STRUCTURE INFORMATION

  • Pablo Aguilar (a1) and Jesús Vázquez (a2)

Abstract

Agents can learn from financial markets to predict macroeconomic outcomes, and learning dynamics can feed back into both the macroeconomy and financial markets. This paper builds on the adaptive learning (AL) model of [Slobodyan, S. and R. Wouters (2012a) American Economic Journal: Macroeconomics 4, 65–101.] by introducing the term structure of interest rates. This extension enables term structure information to fully characterize agents’ expectations in real time. This feature addresses an imperfect information issue neglected in the related AL literature. The term structure of interest rates results in a strong channel of persistence driven by multi-period forecasting. Including the term structure in the AL model results in a model fit similar to that obtained in the rational expectation (RE) version of the model, but it greatly reduces the importance of other endogenous sources of aggregate persistence such as price and wage stickiness and the elasticity of the cost of adjusting capital. The model estimated also shows that term premium innovations are a major source of persistent fluctuations in nominal variables under AL. This stands in sharp contrast to the lack of transmission of term premium shocks to the macroeconomy under REs.

Copyright

Corresponding author

Address correspondence to: Jesús Vázquez, Depto. FAE II, Facultad de Economía y Empresa, Av. Lehendakari Aguirre 83, 48015 Bilbao, Spain. e-mail: jesus.vazquez@ehu.es. Phone: (+34) 94 601 3779. Fax: (+34) 94 601 7123.

Footnotes

Hide All

We are very grateful to Raf Wouters for his close guidance on this work. We are also thankful for helpful comments from the Associate Editor, two anonymous referees, Elena Mattana, Alfonso Novales, Rigas Oikonomou, Luca Pensieroso, Sergey Slobodyan, participants at the 2016 European Summer Meetings of the Econometric Society (Geneva) and seminar participants at the University of Namur, the University of Navarra, the University of the Basque Country, the University of Salamanca, and the Public University of Navarra. Some of this research was supported by the Banco de España, the Spanish Government, and the Basque Government, under grant numbers ECO2013-43773P, ECO2016-78749-P, and IT-793-13.

Footnotes

References

Hide All
Adam, K. (2005) Learning to forecast and cyclical behavior of output and inflation. Macroeconomic Dynamics 9, 127.
Adam, K. (2007) Optimal monetary policy with imperfect common knowledge. Journal of Monetary Economics 54, 267301.
Adam, K. and Marcet, A. (2011) Internal rationality, imperfect market knowledge and asset prices. Journal of Economic Theory 146, 12241252.
Aguilar, P. and Vázquez, J. (2015) The role of term structure in an estimated DSGE model with learning. IRES, Université catholique de Louvain, Discussion paper 2015007.
Aguilar, P. and Vázquez, J. (2018) Term structure and real time learning. Banco de España, Working paper 1803.
Ang, A., Piazzesi, M. and Wei, M. (2006) What does the yield curve tell us about GDP growth? Journal of Econometrics 131, 359403.
Bekaert, G., Cho, S. and Moreno, A. (2010) New-Keynesian macroeconomics and the term structure. Journal of Money, Credit and Banking 42, 3362.
Branch, W. A. and Evans, G. W. (2006) A simple recursive forecasting model. Economics Letters 91, 158–66.
Canova, F. and Gambetti, L. (2010) Do expectations matter? The Great Moderation revisited. American Economic Journal: Macroeconomics 2, 183205.
Casares, M. and Vázquez, J. (2016) Data revisions in the estimation of DSGE models. Macroeconomic Dynamics 20, 16831716.
Chari, V.V., Kehoe, P. J. and McGrattan, E. R. (2009) New Keynesian models: Not yet useful for policy analysis. American Economic Journal: Macroeconomics 1, 242266.
Coenen, G., Levin, A. and Wieland, V. (2005) Data uncertainty and the role of money as an information variable for monetary policy. European Economic Review 49, 9751006.
Cole, S. J. and Milani, F. (2019) The misspecification of expectations in new Keynesian models: a DSGE-VAR approach. Macroeconomic Dynamics 23, 9741007.
De Graeve, F., Emiris, M. and Wouters, R. (2009) A structural decomposition of the US yield curve. Journal of Monetary Economics 56, 545559.
Del Negro, M. and Eusepi, S. (2011) Fitting observed inflation expectations. Journal of Economic Dynamics and Control 35, 21052131.
Del Negro, M., Giannone, D., Giannoni, M. P. and Tambalotti, A. (2017) Safety, liquidity, and the natural rate of interest. Brookings Papers on Economic Activity, Spring 2017, 235294.
Dewachter, H., Iania, L. and Lyrio, M. (2011) A New-Keynesian model of the yield curve with learning dynamics: A Bayesian evaluation. MPRA paper 34461.
Estrella, A. and Mishkin, F. S. (1997) The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank. European Economic Review 41, 13751401.
Eusepi, S. and Preston, B. (2011) Expectations, learning, and business cycle fluctuations. American Economic Review 101, 28442872.
Evans, G. W. and Honkapohja, S. (2001) Learning and Expectations in Macroeconomics. Princeton: Princeton University Press.
Fama, E. (1990) Term structure forecast of interest rates, inflation and real returns. Journal of Monetary Economics 25, 5976.
Galí, J., Smets, F. R. and Wouters, R. (2012) Unemployment in an estimated new Keynesian model. In: Acemoglu, D. and Woodford, M. (eds.), NBER Macroeconomics Annual, vol. 26, pp. 329360. Cambridge, MA: MIT Press.
Greenwood, R., Hanson, S. G. and Stein, J. C. (2015) A comparative–advantage approach to government debt maturity. Journal of Finance 70, 16831722.
Hommes, C. and Zhu, M. (2014) Behavioral learning equilibria. Journal of Economic Theory 150, 778814.
Hördahl, P., Tristani, O. and Vestin, D. (2006) A joint econometric model of macroeconomic and term structure dynamics. Journal of Econometrics 131, 405444.
Ireland, P. N. (2004) A method for taking models to the data. Journal of Economic Dynamics and Control 28, 12051226.
Krishnamurthy, A. and Vissing-Jorgensen, A. (2012) The aggregate demand for Treasury debt. Journal of Political Economy 120, 233267.
Levine, P., Pearlman, J., Perendia, G. and Yang, B. (2012) Endogenous persistence in an estimated DSGE model under imperfect information. Economic Journal 122, 12871312.
Mackowiak, B. and Wiederholt, M. (2009) Optimal sticky prices under rational inattention. American Economic Review 99, 769803.
Mankiw, N. G. and Reis, R. (2002) Sticky information versus sticky prices: a proposal to replace the New Keynesian Phillips curve. Quarterly Journal of Economics 117, 12951328.
Marcet, A. and Sargent, T. J. (1989) Convergence of least-squares learning in environments with hidden states variables and private information. Journal of Political Economy 97, 13061322.
McCallum, B. T. (1994) Monetary policy and the term structure of interest rates. NBER Working Paper 4938. Reprinted in the Federal Reserve Bank of Richmond Economic Quarterly, Volume 91/4 Fall 2005.
Milani, F. (2007) Expectations, learning and macroeconomic persistence. Journal of Monetary Economics 54, 20652082.
Milani, F. (2008) Learning, monetary policy rules, and macroeconomic stability. Journal of Economic Dynamics and Control 32, 31483165.
Milani, F. (2011) Expectation shocks and learning as drivers of the business cycle. Economic Journal 121, 379401.
Milani, F. (in press) Learning and the evolution of the Fed’s inflation target. Macroeconomic Dynamics. doi:10.1017/S136510051900004X.
Mishkin, F. S. (1991) The information in the longer maturity term structure about future inflation. Quarterly Journal of Economics 105, 815828.
Ormeño, A. and Molnár, K. (2015) Using survey data of inflation expectations in the estimation of learning and rational expectations models. Journal of Money, Credit, and Banking 47, 673699.
Orphanides, A. and Williams, J. C. (2005a) Inflation scares and forecast-based monetary policy. Review of Economic Dynamics 8, 498527.
Orphanides, A. and Williams, J. C. (2005b) The decline of activist stabilization policy: natural rate misperceptions, learning, and expectations. Journal of Economic Dynamics and Control 29, 19271950.
Orphanides, A. and Williams, J. C. (2008) Learning, expectations formation, and the pitfalls of optimal control monetary policy. Journal of Monetary Economics 55 (Supplement), S80S96.
Orphanides, A. and Wei, M. (2012) Evolving macroeconomic perceptions and the term structure of interest rates. Journal of Economic Dynamics and Control 36, 239254.
Preston, B. (2005) Learning about monetary policy rules when long-horizon expectations matters. International Journal of Central Banking 1, 81126.
Pruitt, S. (2012) Uncertainty over models and data: the rise and fall of American inflation. Journal of Money, Credit and Banking 44, 341365.
Reis, R. (2009) A sticky information general equilibrium model for policy analysis. In Schmidt-Heubel, K. and Walsh, C. (eds.), Monetary Policy under Uncertainty and Learning, chapter 8, pp. 227283. Central Bank of Chile.
Rudebusch, G. D. and Wu, T. (2008) A macro-finance model of the term structure, monetary policy and the economy. Economic Journal 118, 906926.
Sims, C. A. (2003) Implications of rational inattention. Journal of Monetary Economics 50, 665690.
Sinha, A. (2015) Government debt, learning and the term structure. Journal of Economic Dynamics and Control 53, 268289.
Sinha, A. (2016) Learning and the yield curve. Journal of Money, Credit and Banking 48, 513547.
Slobodyan, S. and Wouters, R. (2008) Estimating a medium-scale DSGE model with expectations based on small forecasting models. Mimeo.
Slobodyan, S. and Wouters, R. (2012a) Learning in a medium-Scale DSGE model with expectations based on small forecasting models. American Economic Journal: Macroeconomics 4, 65101.
Slobodyan, S. and Wouters, R. (2012b) Learning in an estimated medium-scale DSGE model. Journal of Economic Dynamics and Control 36, 2246.
Slobodyan, S. and Wouters, R. (2013) Survey expectations and learning. Mimeo.
Smets, F. R. and Wouters, R. (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97, 586606.
Vázquez, J., María-Dolores, R. and Londoño, J. M. (2013) On the informational role of term structure in the US monetary policy rule. Journal of Economic Dynamics and Control 37, 18521871.

Keywords

AN ESTIMATED DSGE MODEL WITH LEARNING BASED ON TERM STRUCTURE INFORMATION

  • Pablo Aguilar (a1) and Jesús Vázquez (a2)

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed