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The term structure of interest rates in a DSGE model with recursive preferences

Journal

Journal of Monetary Economics

Subject

Finance

Authors / Editors

Van Binsbergen J H;Fernandez-Villaverde J;Koijen R S J;Rubio-Ramirez J

Publication Year

2012

Abstract

A dynamic stochastic general equilibrium (DSGE) model in which households have Epstein and Zin recursive preferences is solved with perturbation. The parameters governing preferences and technology are estimated by maximum likelihood using macroeconomic data and the term structure of interest rates. The estimates imply a large risk aversion, an elasticity of intertemporal substitution higher than one, and substantial adjustment costs. Furthermore, the paper identifies the tensions within the model by estimating it on subsets of these data. The analysis concludes by pointing out potential extensions that may improve the model's fit.

Publication Research Centre

Institute of Finance and Accounting

Available on ECCH

No


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