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Federal Reserve Bank of San Francisco
Working Papers in Applied Economic Theory
A macro-finance model of the term structure, monetary policy, and the economy
Glenn D. Rudebusch
Tao Wu
This paper develops and estimates a macro-finance model that combines a canonical affine no-arbitrage finance specification of the term structure with standard macroeconomic aggregate relationships for output and inflation. From this new empirical formulation, we obtain several important results: (1) the latent term structure factors from finance no-arbitrage models appear to have important macroeconomic and monetary policy underpinnings, (2) there is no evidence of monetary policy inertia or a slow partial adjustment of the policy interest rate by the Federal Reserve, and (3) both forward-looking and backward-looking elements play important roles in macroeconomic dynamics.

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Bibliographic information
Glenn D. Rudebusch & Tao Wu, A macro-finance model of the term structure, monetary policy, and the economy, Working Papers in Applied Economic Theory 2003-17, Federal Reserve Bank of San Francisco, 2003.
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Keywords: Monetary policy ; Econometric models ; Inflation (Finance)
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