DP7781 The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences

Author(s): Jesús Fernández-Villaverde, Ralph Koijen, Juan Francisco Rubio-Ramírez, Jules H. van Binsbergen
Publication Date: April 2010
Keyword(s): DSGE models, Epstein-Zin Preferences, Likelihood Estimation
JEL(s): E30, G12
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7781

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.