How Important is Disaggregation in Structural Models of Interest Rate Determination?

6 Pages Posted: 26 May 2004 Last revised: 26 Oct 2022

See all articles by Benjamin M. Friedman

Benjamin M. Friedman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 1978

Abstract

The results presented below demonstrate that the structural modeling approach to interest rate determination not only stands apart from the sectoral disaggregation question conceptually but also performs fairly well without sectoral disaggregation empirically. This paper presents estimation and dynamic simulation results for an aggregated equivalent to the disaggregated model of the determination of bond yields developed in Friedman (1977; 1979). Instead of six bond demand and two bond supply equations, here there are but one demand and one supply equation. The empirical results show that, while disaggregation is of value in structural interest rate modeling (that is, the disaggregated model outperforms the aggregated one), even the aggregated structural model performs very well in comparison with familiar unrestricted reduced-form term structure equations.

Suggested Citation

Friedman, Benjamin M., How Important is Disaggregation in Structural Models of Interest Rate Determination? (October 1978). NBER Working Paper No. w0294, Available at SSRN: https://ssrn.com/abstract=260482

Benjamin M. Friedman

Harvard University - Department of Economics ( email )

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