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The New Keynesian Model and Bond Yields

Author

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  • Martin M. Andreasen

    (Aarhus University and CREATES and The Danish Finance Institute)

Abstract

This paper presents a New Keynesian model to capture the linkages between macro fundamentals and the nominal yield curve. The model explains bond yields with a low level of news in expected inflation and plausible term premia. This implies that the slope of the yield curve predicts future bond returns, and that risk-adjusted historical bond returns satisfy the expectations hypothesis. A key implication of the model is that U.S. bond yields are consistent with demand shocks that are three times less inflationary than implied by a standard log-linearized New Keynesian model estimated without bond yields.

Suggested Citation

  • Martin M. Andreasen, 2021. "The New Keynesian Model and Bond Yields," CREATES Research Papers 2021-01, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2021-01
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation variance ratios; Robust structural estimation; Term premia; The expectations hypothesis; Unspanned macro variation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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