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Vol. 91, No. 5, Part 2
Posted 2009-10-21

Challenges in Macro-Finance Modeling

by Don H. Kim

This article discusses various challenges in the specification and implementation of "macro-finance" models in which macroeconomic variables and term structure variables are modeled together in a no-arbitrage framework. The author classifies macro-finance models into pure latent-factor models ("internal basis models") and models that have observed macroeconomic variables as state variables ("external basis models") and examines the underlying assumptions behind these models.

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