We estimate the latent factors that underlie the dynamics of the sovereign bond yield curve in Morocco during 2004–14 based on the Dynamic Nelson-Siegel model. On this basis, we explore the interaction between macroeconomic variables and the yield curve, which is of direct relevance to macroeconomic policy-making. In Morocco’s context, we find that tighter monetary policy increases short-end maturities, and that the impact is small and short-lived. Economic activity is also briefly but significantly impacted, suggesting that even under a pegged exchange rate, monetary policy autonomy and effectiveness can be increased through greater central bank independence. Fiscal improvements significantly lower yield levels. Policy conclusions are that improvement in the fiscal and monetary policy frameworks, as well as greater financial sector development and inclusion, could benefit Morocco and strengthen the transmission mechanisms and effectiveness of macroeconomic policies.

Understanding the dynamic evolution of the yield curve is critical to many financial tasks, including pricing financial assets and their derivatives, managing financial risk, allocating portfolios, structuring fiscal debt, conducting monetary policy, and valuing capital goods. Unfortunately, most yield curve models tend to be theoretically rigorous but empirically disappointing, or empirically successful but theoretically lacking. In this book, Francis Diebold and Glenn Rudebusch propose two extensions of the classic yield curve model of Nelson and Siegel that are both theoretically rigorous and empirically successful. The first extension is the dynamic Nelson-Siegel model (DNS), while the second takes this dynamic version and makes it arbitrage-free (AFNS). Diebold and Rudebusch show how these two models are just slightly different implementations of a single unified approach to dynamic yield curve modeling and forecasting. They emphasize both descriptive and efficient-markets aspects, they pay special attention to the links between the yield curve and macroeconomic fundamentals, and they show why DNS and AFNS are likely to remain of lasting appeal even as alternative arbitrage-free models are developed. Based on the Econometric and Tinbergen Institutes Lectures, Yield Curve Modeling and Forecasting contains essential tools with enhanced utility for academics, central banks, governments, and industry.

1. Introduction 1 2. Identification Analysis and F.I.M.L. Estimation for the K-Mode1 10 3. Identification Analysis and F.I.ML. Estimation for the C-Model 23 4. Identification Analysis and F.I.M.L. Estimation for the AB-Model 32 5. Impulse Response Analysis and Forecast Error Variance Decomposition in SVAR Modeling 44 5 .a Impulse Response Analysis 44 5.b Variance Decomposition (by Antonio Lanzarotti) 51 6. Long-run A-priori Information. Deterministic Components. Cointegration 58 6.a Long-run A-priori Information 58 6.b Deterministic Components 62 6.c Cointegration 65 7. The Working of an AB-Model 71 Annex 1: The Notions ofReduced Form and Structure in Structural VAR Modeling 83 Annex 2: Some Considerations on the Semantics, Choice and Management of the K, C and AB-Models 87 Appendix A 93 Appendix B 96 Appendix C (by Antonio Lanzarotti and Mario Seghelini) 99 Appendix D (by Antonio Lanzarotti and Mario Seghelini) 109 References 128 Foreword In recent years a growing interest in the structural VAR approach (SVAR) has followed the path-breaking works by Blanchard and Watson (1986), Bemanke (1986) and Sims (1986), especially in U.S. applied macroeconometric literature. The approach can be used in two different, partially overlapping directions: the interpretation ofbusiness cycle fluctuations of a small number of significantmacroeconomic variables and the identification of the effects of different policies.

United States monetary policy has traditionally been modeled under the assumption that the domestic economy is immune to international factors and exogenous shocks. Such an assumption is increasingly unrealistic in the age of integrated capital markets, tightened links between national economies, and reduced trading costs. International Dimensions of Monetary Policy brings together fresh research to address the repercussions of the continuing evolution toward globalization for the conduct of monetary policy. In this comprehensive book, the authors examine the real and potential effects of increased openness and exposure to international economic dynamics from a variety of perspectives. Their findings reveal that central banks continue to influence decisively domestic economic outcomes—even inflation—suggesting that international factors may have a limited role in national performance. International Dimensions of Monetary Policy will lead the way in analyzing monetary policy measures in complex economies.

In recent years, term premia have been very low and sometimes even negative. Now, with the United States economy growing above potential, inflationary pressures are on the rise. Term premia are very sensitive to the expected future path of growth, inflation, and monetary policy, and an inflation surprise could require monetary policy to tighten faster than anticipated, inducing to a sudden decompression of term and other risk premia, thus tightening financial conditions. This paper proposes a semi-structural dynamic term structure model augmented with macroeconomic factors to include cyclical dynamics with a focus on medium- to long-run forecasts. Our results clearly show that a macroeconomic approach is warranted: While term premium estimates are in line with those from other studies, we provide (i) plausible, stable estimates of expected long-term interest rates and (ii) forecasts of short- and long-term interest rates as well as cyclical macroeconomic variables that are stunningly close to those generated from large-scale macroeconomic models.