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Do the Interest Rates Adjust Asymmetrically across Business Cycles?
| Content Provider | Semantic Scholar |
|---|---|
| Author | Huang, Sai-Nan Zeng, Songrong |
| Copyright Year | 2017 |
| Abstract | Since the late nineties, literature devoted to the term structure of interest rates suggests that the dynamics of interest rate spread might be well described by nonlinear models. This paper examines this possibility for U.S. long-term and short-term interest rates between 1962M1 and 2015M11 by employing the Markov-switching VEC model, which allows for the asymmetric adjustment of interest rates to the long run equilibrium across regimes. Our results support the long-term interest rate adjusts asymmetrically towards the long run equilibrium in different regimes. Besides, our findings point to the regimes identified from the term structure of interest rate by MS-VEC model is closely related to the business cycle dating by the NBER. Introduction Since the late nineties, both theoretical and empirical analysis devoted to the term structure of interest rates have shift from a linear towards a nonlinear setup. Basically, the term structure models developed by, e.g., Naik and Lee (1997), Evans (1998), and Bansal and Zhou (2002) imply that it is necessary to consider the regime switching in the model setup. The underlying idea is that the aggregated economy is subject to discrete and persistent changes in the business cycle. The business cycle fluctuation combined with the corresponding monetary policy impact the term structure of interest rates, leading to the nonlinearity of the term structure. In this paper we consider the possibility that a vector error corrected model with Markov switching in the adjustment parameter (MS-VECM hereafter) would provide a better empirical description of the term structure of interest rates. After its first application to the identification of expansion and recession regimes in economic activity, the Markov switching (MS, henceforth) model has quickly been applied to model other macroeconomic or financial variables, such as oil price, stock market return, exchange rate and interest rate etc. Since MS framework could be used to capture crucial statistical features of macroeconomic or financial variables such as skewness, volatility clustering or mean reverting, and it is suitable for modeling nonlinear dynamics with an understandable economic interpretation, hence it has been wildly employed in identifying business cycle or financial cycle. MS-VECM employed |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://dpi-proceedings.com/index.php/dtssehs/article/download/8957/8526 |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
