Global Factors in the Term Structure of Interest Rates - IMF.pdf

WP/13/223 Global Factors in the Term Structure of Interest Rates Mirko Abbritti, Salvatore DellErba, Antonio Moreno, and Sergio Sola © 2013 International Monetary Fund WP/13/223 IMF Working Paper Fiscal Affairs Department Global Factors in the Term Structure of Interest Rates Prepared by Mirko Abbritti, Salvatore Dell’Erba, Antonio Moreno, and Sergio Sola1 Authorized for distribution by Abdelhak Senhadji November 2013 This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Abstract This paper introduces global factors within a FAVAR framework in an empirical affine term structure model. We apply our method to a panel of international yield curves and show that global factors account for more than 80 percent of term premia in advanced economies. In particular they tend to explain long-term dynamics in yield curves, as opposed to domestic factors which are instead more relevant to short-run movements. We uncover the key role for global curvature in shaping term premia dynamics. We show that this novel factor precedes global economic and financial instability. In particular, it coincides with immediate expectations of permanent expansionary monetary policy during the recent crisis. JEL Classification Numbers: C32, E43, F41, G12 Keywords: Yield Curve, Global Factors,