In this book, Andrew Harvey sets out to provide a unified and comprehensive theory of structural time series models. Unlike the traditional ARIMA models, structural time series models consist explicitly of unobserved components, such as trends and seasonals, which have a direct interpretation. As a result the model selection methodology associated with structural models is much closer to econometric methodology. The link with econometrics is made even closer by the natural way in which the models can be extended to include explanatory variables and to cope with multivariate time series. From the technical point of view, state space models and the Kalman filter play a key role in the statistical treatment of structural time series models. The book includes a detailed treatment of the Kalman filter. This technique was originally developed in control engineering, but is becoming increasingly important in fields such as economics and operations research. This book is concerned primarily with modelling economic and social time series, and with addressing the special problems which the treatment of such series poses. The properties of the models and the methodological techniques used to select them are illustrated with various applications. These range from the modellling of trends and cycles in US macroeconomic time series to to an evaluation of the effects of seat belt legislation in the UK.

Forecasting, Structural Time Series Models and the Kalman Filter

This paper employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. We show that such a model oers an excellent description of the data and can be used to summarize the macroeconomic eects of unconventional monetary policy at the zero lower bound. Our estimates imply that the eorts by the Federal Reserve to stimulate the economy since 2009 succeeded in making the unemployment rate in May 2013 0.23% lower than it otherwise would have been.

/pdf/measuring-the-macroeconomic-impact-of-monetary-policy-at-the-1w3qd5quk8.pdf

Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound

This paper employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. We show that such a model offers an excellent description of the data compared to the benchmark model and can be used to summarize the macroeconomic effects of unconventional monetary policy. Our estimates imply that the efforts by the Federal Reserve to stimulate the economy since July 2009 succeeded in making the unemployment rate in December 2013 1% lower, which is 0.13% more compared to the historical behavior of the Fed.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2469299_code753937.pdf?abstractid=2321323&mirid=4

https://www.federalreserve.gov/pubs/ifdp/2013/1081/ifdp1081.pdf

Capital flows to emerging market economies: A brave new world?

/pdf/methods-of-policy-accommodation-at-the-interest-rate-lower-5d59gvepsi.pdf

Methods of Policy Accommodation at the Interest-Rate Lower Bound

A consensus has recently emerged that a number of variables in addition to the level, slope, and curvature of the term structure can help predict interest rates and excess bond returns. We demonstrate that the statistical tests that have been used to support this conclusion are subject to very large size distortions from a previously unrecognized problem arising from highly persistent regressors and correlation between the true predictors and lags of the dependent variable. We revisit the evidence using tests that are robust to this problem and conclude that the current consensus is wrong. Only the level and the slope of the yield curve are robust predictors of excess bond returns, and there is no robust and convincing evidence for unspanned macro risk.

Robust bond risk premia

Restrictions on the risk-pricing in dynamic term structure models (DTSMs) can unleash the power of no-arbitrage by creating a tighter link between cross-sectional and time-series variation of interest rates. This paper presents a new econometric framework for estimation of affine Gaussian DTSMs under restrictions on risk prices, which addresses the issues of a large model space and of model uncertainty using a Bayesian approach. A simulation study demonstrates the good performance of the proposed method, both for model choice and for inference about the objects of interest. I obtain novel results for the U.S. Treasury yield curve. The data strongly favor tight restrictions on risk pricing: only level risk is priced, and only changes in the slope affect term premia. Incorporating the restrictions into an otherwise standard model substantially alters its conclusions. Interest rate persistence is significantly higher than in a maximally-flexible model, hence expectations of future short rates are more variable, and the role for term premia is somewhat diminished. Hence, restrictions on risk prices help resolve the puzzle of implausibly stable short-rate expectations which has plagued this literature. Restricted models attribute a larger share of the secular decline in long-term interest rates over the last twenty years to the expectations component, consistent with survey evidence on expectations of future interest rates and inflation.

Restrictions on Risk Prices in Dynamic Term Structure Models

_______________________________________________________________________

/pdf/climate-policy-curves-linking-policy-choices-to-climate-2vtz61p6.pdf

Climate Policy Curves: Linking Policy Choices to Climate Outcomes

Bauer and Swanson’s paper is an important contribution to the literature measuring the dynamic effects of monetary policy shocks on the macroeconomy. It shows what can go wrong using apparently exogenous high-frequency monetary policy surprises as instruments for monetary policy shocks, and shows how to correct the faulty estimates and inference by incorporating appropriate control variables. It is also the first paper to use the expanded set of monetary policy surprises compiled by Swanson and Jayawickrema (2022), another important contribution. The culmination of the authors’ work are the monthly impulse responses shown in Figure 8 of the paper. These are the new benchmark impulse response functions for the effect of Federal Reserve monetary policy shocks on the U.S. macroeconomy.

Michael D. Bauer

Papers

Robust bond risk premia

Restrictions on Risk Prices in Dynamic Term Structure Models

Climate Policy Curves: Linking Policy Choices to Climate Outcomes

Discussion of “A Reassessment of Monetary Policy Surprises and High-Frequency Identiﬁcaton” by Michael D. Bauer and Eric T.