The Research Of Relationship Between Interest Term Structure And Macro Economy

Interest rate liberalization in China is now stepping into a stage where critical problems need to be addressed. And treasury bonds futures, the main form of interest rate futures, has been traded since September,2013. At the same time, in order to address the global financial crisis and European debt crisis, quantitative easing monetary policy has become a main policy instrument, which brings about more instability to the global economy. Under such a background, it is necessary to understand the relationship between interest rate and the macro economy in a more comprehensive way, which is very important to improve the effectiveness of monetary policy in China. From the perspective of interest rate term structure, this paper studies the relationship between interest rate and the macro economy under several categories of classic macro economic models. The problems we discuss are as followings.We start from the expectation theory which gives a most reduced form of the relationship between interest rate term structure and macro economy. Based on the expectation theory, we study the relation between term structure and short and long term interest rates in the future, and we then discuss the relation between interest rate term structure and inflation or economic growth. Macro finance models developed later are much more complicated in techniques, but their focus is consistent with expectation theory.Curves of static interest rate map the level of interest rates with different terms. Empirical study of interest rate term structure starts from the return on bonds, and getting returns of key terms is the basis of dynamic models of interest rate term structure. We review the main methods of fitting curves of static interest rate and compare their features and functions. Besides, after reviewing the development of Chinese bond market, we introduce the fitting method and characteristics of return curves provided by financial institutions.The paper then comes into the study of dynamic models of interest rate term structure, which is the core of the research field in interest rate term structure. We first enunciate the principles of asset pricing from two perspectives:equilibrium and no arbitrage. Because the equilibrium framework is closely related to macro economy, we study bond pricing under different terms by inducing classic interest rate models, and pay special attention on the analysis of the ideas and alterations of affine models of interest rate term structure.We study the relation between interest rate term structure and macro economic variables under the framework of dynamic NS models and no-arbitrage NS models. NS curve is an important curve fitting static interest rates, and dynamic NS models are the combination of the static NS curve and dynamic factors. If the constraint condition of no arbitrage in risk neutral world is added, we can get no-arbitrage NS models.Compared with dynamic NS models and no arbitrage models, macro finance models developed on the basis of equilibrium models of interest rate term structure have more significant economics meanings. This paper then discusses the relation between interest rate term structure with macro economic variables under the framework of macro finance models. We classify macro finance models into two categories. The first one is macro factors finance models based on affine models of interest rate term structure, for example, combine macro factors and affine factors by Taylor’s rule. The second one is macro structure finance models, developing macro economic meanings of equilibrium models of interest rate term structure mainly from two perspectives. One is adding complete market constraints to basic bond pricing models and develop neo-Keynesian macro structure finance models. The other is developing more delicate bond pricing models by replacing power utility functions of the representative agent with recursive utility functions.This paper aims to make clear the characteristics and development of interest rate term structure models, in order to give a comprehensive and broad review of research on the relation between interest rate term structure and macro economic variable. After discussing theoretical models in each chapter, we carry on related empirical studies. Only when we understand the features and functions of different models and every model’s improvement to previous research, can we choose proper empirical methods to test theoretical models, and to put forward current theoretical study in the future.