Yield Curve In An Estimated Nonlinear Macro Model
This paper estimates a sticky price macro model with US macro and term structure data using Bayesian methods. The model is solved by a nonlinear method. The authors find that the degree of nominal rigidity is important for identifying macro shocks that affect the yield curve. When prices are more flexible, a slowly varying inflation target of the central bank is the main driver of the overall level of the yield curve by changing long-run inflation expectations. In contrast, when prices are stickier, a highly persistent markup shock is the main driver. The posterior distribution of the parameters in the model is found to be bi-modal.