@article{Equilibrium-Based:1341, recid = {1341}, author = {Garcia, René and Luger, Richard}, title = {The Canadian Macroeconomy and the Yield Curve: An Equilibrium-Based Approach}, publisher = {Bank of Canada}, address = {2005}, pages = {1 online resource (v, 49 pages)}, abstract = {The authors develop and estimate an equilibrium-based model of the Canadian term structure of interest rates. The proposed model incorporates a vector-autoregression description of key macroeconomic dynamics and links them to those of the term structure, where identifying restrictions are based on the first-order conditions that describe the representative investor's optimal consumption and portfolio plan. A remarkable result is that the in-sample average pricing errors obtained with the equilibrium-based model are only slightly larger than those obtained with a far more flexible no-arbitrage model. The gains associated with parsimony become obvious out-of-sample, where the equilibrium model delivers much more accurate predictions, especially for yields with longer-term maturities. The preferred equilibrium model has impulse responses that are consistent with long-term inflation expectations being anchored, so a surprise increase in inflation does not necessarily raise expectations of higher future inflation.}, url = {http://www.oar-rao.bank-banque-canada.ca/record/1341}, doi = {https://doi.org/10.34989/swp-2005-36}, }