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Federal Reserve Bank of San Francisco
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A macro-finance model of the term structure, monetary policy, and the economy
Glenn D. Rudebusch
Tao Wu
Abstract

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