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Title: The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences

Author(s): Jesús Fernández-Villaverde, Ralph Koijen, Juan Francisco Rubio-Ramírez and Jules H. van Binsbergen

Publication Date: April 2010

Keyword(s): DSGE models, Epstein-Zin Preferences and Likelihood Estimation

Programme Area(s): International Macroeconomics

Abstract: We solve a dynamic stochastic general equilibrium (DSGE) model in which the representative household has Epstein and Zin recursive preferences. The parameters governing preferences and technology are estimated by means of maximum likelihood using macroeconomic data and asset prices, with a particular focus on the term structure of interest rates. We estimate a large risk aversion, an elasticity of intertemporal substitution higher than one, and substantial adjustment costs. Furthermore, we identify the tensions within the model by estimating it on subsets of these data. We conclude by pointing out potential extensions that might improve the model's fit.

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Bibliographic Reference

Fernández-Villaverde, J, Koijen, R, Rubio-Ramírez, J and van Binsbergen, J. 2010. 'The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7781