A New-Keynesian Model of the Yield Curve with Learning Dynamics: A Bayesian Evaluation

Abstract

We estimate a New-Keynesian macro-…nance model of the yield curve incorporating learning by private agents with respect to the long-run expectation of in‡ation and the equilibrium real interest rate. A preliminary analysis shows that some liquidity premia, expressed as a degree of mispricing relative to no-arbitrage restrictions, and time variation in the prices of risk are important features of the data. These features are, therefore, included in our learning model. The model is estimated on U.S. data using Bayesian techniques. The learning model succeeds in explaining the yield curve movements in terms of macroeconomic shocks. The results also show that the introduction of a learning dynamics is not su¢ cient to explain the rejection of the extended expectations hypothesis. The