Banque Nationale De Belgique Sa · EURONEXT:BNB
Banque Nationale De Belgique Sa — Technical Presentation (October 2008)
38 slides from Banque Nationale De Belgique Sa's technical presentation, October 2008
Slide 1: Imperfect Information, Macroeconomic Dynamics and the Term Structure of Interest Rates
Imperfect Information, Macroeconomic Dynamics and the Term Structure of Interest Rates: An Encompassing Macro-Finance Model Hans Dewachter KULeuven and RSM, EUR October 2008 NBB Colloquium (KULeuven and RSM, EUR) An Encompassing Macro-Finance Model October 2008 1 / 34
Slide 2: Overview
Overview Main goals of the paper Motivation Macro-Finance framework Econometric issues Empirical ndings Conclusions NBB Colloquium (KULeuven and RSM, EUR) An Encompassing Macro-Finance Model October 2008 2 / 34
Slide 3: Main goals of the paper
Main goals of the paper Main goals of the paper Main goals of the paper NBB Colloquium (KULeuven and RSM, EUR) An Encompassing Macro-Finance Model October 2008 3 / 34
Slide 4: Main goals of the paper
Main goals of the paper Main goals of the paper The central question of this paper: Can we improve the existing empirical Macro-Finance models of the yield curve? Methodological approach: Assess/estimate the empirical relevance of three types of extensions of the standard Macro-Finance framework: De
Slide 5: Motivation
Motivation Motivation Motivation NBB Colloquium (KULeuven and RSM, EUR) An Encompassing Macro-Finance Model October 2008 5 / 34
Slide 6: A need for more elaborated Macro-Finance models?
Motivation Motivation A need for more elaborated Macro-Finance models? Motivation: Despite the long-standing postulate and empirical ndings of a close link between the yield curve and the macroeconomic factors, no fully satisfactory macroeconomic model of the yield curve exists: Standard New-Keynesi
Slide 7: Performance of the standard NK and Mac-Fin model
Motivation Motivation A need for more elaborated Macro-Finance models? Performance of the standard NK and Mac-Fin model (US data 1962-2007). Yields In . Exp. (SPF) Maturity 1/2 yr 1 yr 3yr 5 yr 10 yr 1yr 10yr Total variation yield (st. dev.) 0.027 0.028 0.027 0.026 0.024 0.020 0.015 Standard New-Key
Slide 8: Fit of the US yield curve: standard Mac-Fin model
Motivation Motivation A need for more elaborated Macro-Finance models? Fit of the US yield curve: standard Mac-Fin model (1960-2007) . Yield curve fit maturity 1/4 years Yield curve fit maturity 1/2 years 0.3 0.3 0.2 0.2 0.1 0.1 0 0 -0.1 -0.1 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 19
Slide 9: Volatile implied inflation expectations and target
Motivation Motivation A need for more elaborated Macro-Finance models? But (excessively?) volatile implied in ation expectations and target? Inflation expectations (10 yr.): SPF data Long-term inflation expectations Inflation 0.2expectations (10 yr.): model Inflation expectations (10 yr.): break-eve
Slide 10: Macro-Finance Framework
Macro-Finance Framework Macro-Finance Framework Macro-Finance Framework NBB Colloquium (KULeuven and RSM, EUR) An Encompassing Macro-Finance Model October 2008 10 / 34
Slide 11: Macro-Finance Framework Overview
Macro-Finance Framework Macro-Finance Framework Overview The standard Macro-Finance model The encompassing model Af ne yield curve representation Perceived Law of Motion Learning NBB Colloquium (KULeuven and RSM, EUR) An Encompassing Macro-Finance Model October 2008 11 / 34
Slide 12: The standard Macro-Finance model
Macro-Finance Framework Macro-Finance Framework The standard Macro-Finance model Standard Macro-Finance models (Hordahl et al. (2006), Bekaert et al. (2006), Doh (2006), Dewachter and Lyrio (2006), De Graeve et al. (2007), Rudebusch and Wu (2004)...) Extended expectations hypothesis relates the long
Slide 13: Encompassing/extended Macro-Finance model
Macro-Finance Framework Macro-Finance Framework The standard Macro-Finance model Encompassing/extended Macro-Finance model: Extended expectations hypothesis under the Perceived Law of Motion (EP PLM): Pm 1 yt (m) = m1 j=0 EtP [it+j ] + rpt Extended NK macro model including perceived (time-varying) e
Slide 14: Affine yield curve representation
Macro-Finance Framework The Macro-Finance framework Af ne yield curve representation We obtain an af ne yield curve representation in the (perceived) state, XtP by assuming log-normal pricing (Ang and Piazzesi (2003)): yt (m) = a(m)=m (b(m)=m) XtP + (m) + t (m) | {z } | {z } | {z } No-Arbitrage Liq.
Slide 15: Affine yield curve representation: no-arbitrage
Macro-Finance Framework The Macro-Finance framework Af ne yield curve representation We obtain an af ne yield curve representation in the (perceived) state, XtP by assuming log-normal pricing (Ang and Piazzesi (2003)): yt (m) = a(m)=m (b(m)=m) XtP + (m) + t (m) | {z } | {z } | {z } No-Arbitrage Liq.
Slide 16: Affine yield curve representation: restrictions
Macro-Finance Framework The Macro-Finance framework Af ne yield curve representation We obtain an af ne yield curve representation in the (perceived) state, XtP by assuming log-normal pricing (Ang and Piazzesi (2003)): yt (m) = a(m)=m (b(m)=m) XtP + (m) + t (m) | {z } | {z } | {z } No-Arbitrage Liq.
Slide 17: Perceived Law of Motion: Macroeconomic dynamics
Macro-Finance Framework The Macro-Finance framework Perceived Law of Motion: Macroeconomic dynamics The Perceived Law of Motion is a VAR(I) in the perceived state, XtP : XtP = CP + P XtP 1 + P P P S "t ; XtP = [ t ; yt ; it ; t P ; Pt ] NBB Colloquium (KULeuven and RSM, EUR) An Encompassing Macro-Fi
Slide 18: Perceived Law of Motion: New-Keynesian model
Macro-Finance Framework The Macro-Finance framework Perceived Law of Motion: Macroeconomic dynamics The Perceived Law of Motion is a VAR(I) in the perceived state, XtP : XtP = CP + P XtP 1 + P P P S "t ; XtP = [ t ; yt ; it ; t P ; Pt ] P P New-Keynesian model with stoch. trends t and t : t = EtP t+
Slide 19: Updating the perceived stochastic trends
Macro-Finance Framework The Macro-Finance framework Perceived Law of Motion: Macroeconomic dynamics The Perceived Law of Motion is a VAR(I) in the perceived state, XtP : XtP = CP + P XtP 1 + P P P S "t ; XtP = [ t ; yt ; it ; t P ; Pt ] P P New-Keynesian model with stoch. trends t and t : Updating t
Slide 20: Learning dynamics
Macro-Finance Framework The Macro-Finance framework Learning dynamics Learning dynamics are modeled along the lines of Kozicki and Tinsley (2005): P P t = t 1+w " ;t + (1 w ) b ;t + g ( t EtP 1 t ) P P t = t 1+w " ;t + (1 w ) b ;t + g (it t EtP 1 (it t )) The learning rule updates perceived trends i
Slide 21: Econometric issues
Econometric issues Econometric issues Econometric issues NBB Colloquium (KULeuven and RSM, EUR) An Encompassing Macro-Finance Model October 2008 17 / 34
Slide 22: Econometric issues Overview
Econometric issues Data Econometric issues Overview Data Summary of Bayesian estimation procedure Sets of estimated parameters Prior distributions Likelihood Alternative model versions NBB Colloquium (KULeuven and RSM, EUR) An Encompassing Macro-Finance Model October 2008 18 / 34
Slide 23: Data
Econometric issues Data Econometric issues Data Model is estimated on US data: 1960Q2 till 2006Q4. In ation: quarter-by-quarter GDP de ator (p.a. terms) is used. Source: Federal Reserve Economic Data archive (FRED). Output gap: CBO output gap measure is used (no- real time data). Source: Congression
Slide 24: Summary: Bayesian estimation framework
Econometric issues Summary Bayesian Econometric issues Summary: Bayesian estimation framework MCMC (Metropolis-Hastings) identi cation of the posterior density p( i j Z T ) : p( i j Z T ) = L(Z T j i )p( i )=p(Z T ) Parameters i : structural parameters related to the NK model, learning, prices of ri
Slide 25: Versions of the model
Econometric issues Model versions Econometric issues Versions of the model Table: P ROPERTIES OF ALTERNATIVE VERSIONS OF THE MODEL Model Macro (# stoch. trends) Prices of Risk Expectations Mispricing IS NK0 NK model (0) Consistent 0 Full-info RE Yes Stand. NK mod IS MF1 NK model (1) Consistent 0 Ful
Slide 26: Empirical findings
Empirical ndings Empirical ndings Empirical ndings NBB Colloquium (KULeuven and RSM, EUR) An Encompassing Macro-Finance Model October 2008 22 / 34
Slide 27: Empirical findings overview
Empirical ndings Empirical ndings Improving standard Macro-Finance models? Comparing model versions Estimation results of the MFE model Parameter estimates Implied macroeconomic factors Macro factors and the yield curve implied by the MFE model Fit of the yield curve Liquidity effects NBB Colloquium
Slide 28: Comparing model versions
Empirical ndings Improving standard Macro-Finance models? Improving standard Macro-Finance models? Comparing model versions Conclusion 1: The encompassing model, incorporating time-varying equilibrium real rates, imperfect information and liquidity effects, is strongly favored by the data. Table: M
Slide 29: Parameter estimates of the encompassing model
Empirical ndings Estimation results Estimation results Parameter estimates of the encompassing model Conclusion 2: The structural parameters of the encompassing model are plausible and aligned to the empirical macro literature. The behavioral parameters of the (semi-) structural NK model are in line
Slide 30: Parameter estimates table
Empirical ndings Estimation results Estimation results Parameter estimates of the encompassing model Param. Mean Std. Dev. Mode Crit.val. 5% Crit. val. 95% Phillips curve In ation indexation ! 0.5337 0.0327 0.5288 0.4829 0.5891 Output sensitivity ! 0.0137 0.0042 0.0117 0.0078 0.0212 IS curve Habit p
Slide 31: Imperfect information and learning effects
Empirical ndings Estimation results Estimation results Parameter estimates of the encompassing model Conclusion 3: Imperfect information and learning effects dominate long-run in ation expectations. The parameter estimates imply only weak anchoring of subjective in ation expectations. In ation belie
Slide 32: Posterior density estimates: learning parameters
Empirical ndings Estimation results Estimation results Parameter estimates of the encompassing model Table: P OSTERIOR DENSITY ESTIMATES I B : L EARNING PARAMETERS Param. Mean Std. Dev. Mode Crit.val. 5% Crit. val. 95% P Learning parameters: Long-run in ation expectations: t Weight RE ! w 0.6083 0.0
Slide 33: Implied factors
Empirical ndings Estimation results Estimation results Implied factors Inflation and long-run inflation expectations Inflation and the inflation target 0.14 Conf. int. 95% 0.14 Conf. int. 95% Inflation Inflation 0.12 0.12 L-R inflat. expect.(model) Inflat. target 0.1 L-R inflat. expect.(SPF) 0.1 L-R
Slide 34: Yield curve fit
Empirical ndings Macro factors and the yield curve Macro factors and the yield curve Yield curve t Conclusion 4: The encompassing Macro-Finance model captures a substantial part of the time variation of the yield curve and aligns in ation expectations to survey data SPF (unlike standard Mac-Fin mode
Slide 35: Observed and fitted yield curve of the MFE model
Empirical ndings Macro factors and the yield curve Macro factors and the yield curve Yield curve t Figure: O BSERVED AND FITTED YIELD CURVE OF THE MFE MODEL Yield curve fit maturity 1/4 years Yield curve fit maturity 1/2 years 0.2 0.2 0.15 0.15 0.1 0.1 0.05 0.05 0 0 1960 1965 1970 1975 1980 1985 199
Slide 36: Long-term yields, real rate and inflation expectations
Empirical ndings Macro factors and the yield curve Macro factors and the yield curve Yield curve t Long-term maturity yields, real rate and inflation expectations 0.16 Yield data (10 year maturity) 0.14 Real rate(10yr av.): model-implied 0.12 Yield fit (10 year maturity) Fitting error 0.1 Real rate(
Slide 37: Mispricing or liquidity effects
Empirical ndings Macro factors and the yield curve Macro factors and the yield curve Mispricing or liquidity effects Conclusion 5: There is evidence of signi cant mispricing (liquidity preference effects), especially at the short end of the yield curve. -3 Average mispricing: mode and 95% confidence
Slide 38: Conclusions
Conclusions Conclusions In this paper the standard (empirical) Macro-Finance models are extended by introducing (i) time variation in the equilibrium real interest rate (ii) liquidity effects and (iii) learning. The encompassing model outperforms all existing Macro-Finance models. The model 'explain
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