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Term Structure, Inflation, and Real Activity

Published online by Cambridge University Press:  01 August 2009

Andrea Berardi
Andrea Berardi*
Affiliation:
University of Verona, SAFE Center, Department of Economics, Via Giardino Giusti 2, 37129 Verona, Italy. [email protected]
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Abstract

This paper estimates an internally consistent structural model that imposes cross-sectional restrictions on the dynamics of the term structure of interest rates, inflation, and output growth. Distinct from previous term structure settings, this model introduces both time-varying central tendencies and a stochastic conditional mean of output growth. The estimation of the model, which is based on U.S. data over a 1960 to 2005 sample period, provides reliable estimates for the implicit term structures of real interest rates, expected inflation rates, and inflation risk premia, as well as for expectations of macroeconomic variables. The model has better out-of-sample forecasting properties than a number of alternative models, and it contradicts the puzzling evidence that during the “Great Moderation” in inflation subsequent to the mid-1980s, the forecasting ability of structural models deteriorated with respect to atheoretic statistical models.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 4 , August 2009 , pp. 987 - 1011
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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