Forecasting Long-Term Interest Rates with a General-Equilibrium Model of the Euro Area: What Role for Liquidity Services of Bonds?

Author： Zagaglia Paolo

Publisher： Springer Publishing Company

ISSN： 1387-2834

Source： Financial Engineering and the Japanese Markets, Vol.20, Iss.4, 2013-11, pp. : 383-430

Disclaimer: Any content in publications that violate the sovereignty, the constitution or regulations of the PRC is not accepted or approved by CNPIEC.

Previous Menu Next

Abstract

This paper studies the forecasting performance of a general equilibrium model of bond yields where government bonds provide liquidity services and are, as such, an integral part of the monetary transmission mechanism. The model is estimated with Bayesian methods on Euro area data. I compare the out-of-sample predictive performance of the model against a variety of competing specifications, including that of De Graeve et al. (J Monet Econ 56(4):545–559, 2009). Forecast accuracy is evaluated through both univariate and multivariate measures. I also control the statistical significance of the forecast differences using the tests of Diebold and Mariano (J Bus Econ Stat 13(3):253–263, 1995), Hansen (J Bus Econ Stat 23:365–380, 2005) and White (Econometrica 68(5):1097–1126, 1980). The results indicate that accounting for the liquidity services of bonds contributes to generate superior out-of-sample forecasts for both real variables, such as output, and inflation, and for bond yields.