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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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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  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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Cited by:
  1. Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2010. "Expectations-Driven Cycles in the Housing Market," MPRA Paper 26128, University Library of Munich, Germany.
  2. Görtz, Christoph & Tsoukalas, John D., 2012. "News and Financial Intermediation in Aggregate and Sectoral Fluctuations," Dynare Working Papers 12, CEPREMAP.
  3. repec:pra:mprapa:38985 is not listed on IDEAS
  4. Sandra Gomes & Caterina Mendicino, 2011. "Housing Market Dynamics: Any News?," Working Papers w201121, Banco de Portugal, Economics and Research Department.
  5. Barsky, Robert B. & Sims, Eric R., 2011. "News shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 273-289.
  6. Cristian Badarinza & Emil Margaritov, 2011. "News and policy foresight in a macro-finance model of the US," Working Paper Series 1313, European Central Bank.
  7. Virginia Queijo von Heideken & Ferre De Graeve, 2012. "Fiscal policy in contemporary DSGE models," 2012 Meeting Papers 74, Society for Economic Dynamics.
  8. Matsumoto, Akito & Cova, Pietro & Pisani, Massimiliano & Rebucci, Alessandro, 2011. "News shocks and asset price volatility in general equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2132-2149.
  9. William T. Gavin & Benjamin D. Keen & Michael R. Pakko, 2012. "Taylor-type rules and total factor productivity," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 41-64.
  10. Deokwoo Nam & Jian Wang, 2012. "Are predictable improvements in TFP contractionary or expansionary? implications from sectoral TFP," Globalization and Monetary Policy Institute Working Paper 114, Federal Reserve Bank of Dallas.

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