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Department of Economics, Stockholm University Research Papers in Economics, Department of Economics, Stockholm University

No 2009:14:
Forecasting with a DSGE Model of the term Structure of Interest Rates: The Role of the Feedback

Paolo Zagaglia ()

Abstract: This paper studies the forecasting performance of the general equilibrium model of bond yields of Marzo, Söderström and Zagaglia (2008), where long-term interest rates are an integral part of the monetary transmission mechanism. The model is estimated with Bayesian methods on Euro area data. I investigate the out-of-sample predictive performance across different model specifications, including that of De Graeve, Emiris and Wouters (2009). The accuracy of point forecasts is evaluated through both univariate and multivariate accuracy measures. I show that taking into account the impact of the term structure of interest rates on the macroeconomy generates superior out-of-sample forecasts for both real variables, such as output, and inflation, and for bond yields.

Keywords: Monetary policy; yield curve; general equilibrium; bayesian estimation; (follow links to similar papers)

JEL-Codes: E43; E44; E52; (follow links to similar papers)

43 pages, May 20, 2009

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