A Macroeconomic Model of the Term Structure of Interest Rates in Mexico

This paper investigates how di¤erent macroeconomic shocks a¤ect the term-structure of interest rates in Mexico. In particular, we develop and estimate a model that combines an a ¢ ne no-arbitrage nance speci\u85cation of the term structure with a small scale macroeconomic model for a small open economy. Results from the estimation of the model show that term premia are countercyclical, and that they increase with the level of the ination rate. In addition, our model delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks. For example, shocks that are perceived to have a persistent e¤ect on ination a¤ect the level of the yield curve. The e¤ect on medium and long-term yields results from the increase in expected future short rates and in risk premia. With respect to demand shocks, our results show that a positive demand shock leads to an upward attening shift in the yield curve. In this case, the attening of the curve is explained by the monetary policy response and by the fall in (countercyclical) term premia. Corresponding Author