Long Memory Ane Term Structure Models⇤

We develop a Gaussian discrete time essentially ane term structure model which allows for long memory. This feature reconciles the strong persistence observed in nominal yields and inflation with the theoretical implications of ane models, especially for long maturities. We characterise the dynamic and cross-sectional implications, in particular in terms of volatility, of long memory for our model. We explain how long memory can naturally arise within the term structure of interest rates, providing a theoretical underpinning for our model. Despite the infinite-dimensional structure that long memory implies, we show how to cast the model in state space and estimate it by maximum likelihood. We present an empirical example where we estimate a two-factor version of the model whereby the unobserved factors have a clear economic interpretation as the real short rate and expected inflation