Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297523 
Year of Publication: 
2020
Citation: 
[Journal:] Contemporary Economics [ISSN:] 2300-8814 [Volume:] 14 [Issue:] 2 [Year:] 2020 [Pages:] 182-200
Publisher: 
University of Finance and Management in Warsaw, Faculty of Management and Finance, Warsaw
Abstract: 
The purpose of this study is to estimate the natural yield curve for an emerging economy, with Indonesia as a case study. The estimation is done by a two-stage approach, namely, the decomposition of the yield curve component through a dynamic Nelson-Siegel model, the results of which are then used to estimate a natural yield curve. Both steps are estimated through state space modeling with a Kalman filter. In addition, the study also analyzes the principal components of the real yields of Indonesia to prove that the use of the Nelson-Siegel model is relevant and sufficient. The main contribution of this research is the estimation of the natural yield curve for an emerging economy. The findings provide some evidence that a policy mix is needed for emerging economies to maintain macroeconomic stability. Some other findings are as follows: first, almost all yield curve variations can be explained by the first three principal components that moved similarly to level, slope, and curvature. Second, Indonesia's natural yield curve always has a positive slope over time. Third, across maturities, medium-term yields have the largest impact on the output gap. Fourth, the estimated natural yield curve can provide a gauge of the monetary policy stance, or external pressure.
Subjects: 
term structure
yield curve
natural interest rate
monetary policy
Kalman Filter
JEL: 
C32
E43
E52
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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