Long memory macroeconomic model of the term structure of interest rates

Abstract

In this paper, we employ the Sowell (1989) multivariate long memory model to describe the dynamic behaviors of our macro system. Moreover, we incorporate the partial seasonal adjustment operator into our macro model by which we significantly reduce the AR lag order lower to one,hence reducing a large amount of parameters. Empirically, we apply the estimation procedure of Hualde and Robinson (2006). We found that 3 month short interest rate is fractionally cointegrated with the long term yield, implying a stable long run relationship between them.