Global Factors in the Term Structure of Interest Rates
42 Pages Posted: 10 Dec 2013
Date Written: November 2013
Abstract
This paper introduces global factors within a FAVAR framework in an empirical affine term structure model. We apply our method to a panel of international yield curves and show that global factors account for more than 80 percent of term premia in advanced economies. In particular they tend to explain long-term dynamics in yield curves, as opposed to domestic factors which are instead more relevant to short-run movements. We uncover the key role for global curvature in shaping term premia dynamics. We show that this novel factor precedes global economic and financial instability. In particular, it coincides with immediate expectations of permanent expansionary monetary policy during the recent crisis.
Keywords: Interest rate structures, Bonds, Monetary policy, Developed countries, Economic models, Yield Curve, Global Factors, FAVAR, Affine Term Structure Models, Term Premium, inflation, monetary economics, expansionary monetary policy, monetary policies, economic instability, inflation forecasts, expansionary monetary policies, monetary fund, real interest rate, reduction of inflation, monetary authorities, inflationary expectations
JEL Classification: C32, E43, F41, G12
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