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The Yield Curve and Macroeconomic Dynamics

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  • Peter Hördahl
  • Oreste Tristani
  • David Vestin

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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Bibliographic 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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