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The Yield Curve and Macroeconomic Dynamics

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Author Info
Peter Hördahl
Oreste Tristani
David Vestin

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Abstract

We show that microfounded DSGE models with nominal rigidities can be successful in replicating features of bond yield data, including sizeable term premia and volatile long-term yields, which have previously been considered puzzling in general equilibrium frameworks. At the same time, sample moments of consumption growth and inflation can be fit relatively well. The improved model performance does not arise directly from the presence of nominal rigidities. However, this feature introduces (short-run) monetary non-neutrality, so that monetary policy affects consumption dynamics and bond prices. A high degree of 'interest rate smoothing' in the policy rule is essential for our results. Copyright © European Central Bank. Journal compilation © Royal Economic Society 2008.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0297.2008.02197.x
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Publisher Info
Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 118 (2008)
Issue (Month): 533 (November)
Pages: 1937-1970
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Handle: RePEc:ecj:econjl:v:118:y:2008:i:533:p:1937-1970

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  1. Bianca De Paoli, Alasdair Scott, Olaf Weeken, 2007. "Asset pricing implications for a New Keynesian model," Money Macro and Finance (MMF) Research Group Conference 2006 156, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  2. Queijo von Heideken, Virginia, 2008. "Monetary Policy Regimes and the Volatility of Long-Term Interest Rates," Working Paper Series 220, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  3. Taeyoung Doh, 2009. "Yield curve in an estimated nonlinear macro model," Research Working Paper RWP 09-04, Federal Reserve Bank of Kansas City. [Downloadable!]
  4. Glenn D. Rudebusch & Brian P. Sack & Eric T. Swanson, 2006. "Macroeconomic implications of changes in the term premium," Working Paper Series 2006-46, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  5. Ravenna , Federico & Seppälä, Juha, 2007. "Monetary policy, expected inflation and inflation risk premia," Research Discussion Papers 18/2007, Bank of Finland. [Downloadable!]
  6. Glenn D. Rudebusch & Eric T. Swanson, 2007. "Examining the bond premium puzzle with a DSGE model," Working Paper Series 2007-25, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  7. Peter Hördahl & Oreste Tristani, 2007. "Mortage interest rate dispersion in the euro area," Working Paper Series 734, European Central Bank. [Downloadable!]
  8. Monika Piazzesi & Martin Schneider, 2006. "Equilibrium Yield Curves," NBER Working Papers 12609, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Peter Hördahl & Oreste Tristani & David Vestin, 2006. "The term structure of inflation risk premia and macroeconomic dynamics," Computing in Economics and Finance 2006 203, Society for Computational Economics. [Downloadable!]
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