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Macroeconomic implications of changes in the term premium

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  • Glenn D. Rudebusch
  • Brian P. Sack
  • Eric T. Swanson

Abstract

Linearized New Keynesian models and empirical no-arbitrage macro-finance models offer little insight regarding the implications of changes in bond term premiums for economic activity. We investigate these implications using both a structural model and a reduced-form framework. We show that there is no structural relationship running from the term premium to economic activity, but a reduced-form empirical analysis does suggest that a decline in the term premium has typically been associated with stimulus to real economic activity, which contradicts earlier results in the literature.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2006-46.

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Date of creation: 2006
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Handle: RePEc:fip:fedfwp:2006-46

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Keywords: Interest rates ; Economic forecasting ; Econometric models;

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