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TERM PREMIA IMPLICATIONS OF MACROECONOMIC REGIME CHANGES

Published online by Cambridge University Press:  04 July 2014

Giacomo Carboni
Giacomo Carboni*
Affiliation:
European Central Bank
*
Address correspondence to: Giacomo Carboni, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany; e-mail: giacomo.carboni@ecb.int.
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Abstract

Term premia are shown to provide crucial information for discriminating among alternative sources of change in the economy, namely shifts in the variance of structural shocks and in monetary policy. These sources have been identified as competing explanations for time-varying features of major industrial economies during the 1980s and 1990s. Although hardly distinguishable through the lens of standard dynamic stochastic general equilibrium (DSGE) models, lower nonpolicy shock variances and “tighter” monetary policy regimes imply higher and lower term premia, respectively. As a result, moving to tighter monetary policy alone cannot explain the improved U.S. macroeconomic stability in the 1980s and 1990s: term premia would have shifted downward, a fact inconsistent with the evidence of higher premia from early 80s onward. Conversely, favorable shifts in nonpolicy innovation variance imply movements in term premia that are at least qualitatively consistent with historical patterns.

Keywords

Term PremiaRegime SwitchingDSGE Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 1 , January 2016 , pp. 251 - 275
Copyright
Copyright © Cambridge University Press 2014 

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