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News Shocks and the Slope of the Term Structure of Interest Rates

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  • André Kurmann
  • Christopher Otrok

Abstract

We provide a new structural interpretation of the relationship between the slope of the term structure of interest rates and macroeconomic fundamentals. We first adopt an agnostic identification approach that allows us to identify the shocks that explain most of the movements in the slope. We find that two shocks are sufficient to explain virtually all movements in the slope. Impulse response functions for the first shock, which explains the majority of the movements in the slope, lead us to interpret this main shock as a news shock about future productivity. We confirm this interpretation by formally identifying such a news shock as in Barsky and Sims (2009) and Sims (2009). We then assess to what extent a New Keynesian DSGE model is capable of generating the observed slope responses to a news shock. We find that augmenting DSGE models with a term structure provides valuable information to discipline the description of monetary policy and the model’s response to news shocks in general.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1005.

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Date of creation: 2010
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Handle: RePEc:lvl:lacicr:1005

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Keywords: Term structure of interest rates; news; productivity shocks; business cycles; monetary policy;

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References

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  1. News Shocks and the Slope of the Term Structure of Interest Rates
    by Christian Zimmermann in NEP-DGE blog on 2010-04-18 17:23:43
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