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The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach

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  • Francis X. Diebold
  • Glenn D. Rudebusch
  • S. Boragan Aruoba

Abstract

We estimate a model that summarizes the yield curve using latent factors (specifically, level, slope, and curvature) and also includes observable macroeconomic variables (specifically, real activity, inflation, and the monetary policy instrument). Our goal is to provide a characterization of the dynamic interactions between the macroeconomy and the yield curve. We find strong evidence of the effects of macro variables on future movements in the yield curve and evidence for a reverse influence as well. We also relate our results to the expectations hypothesis.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10616.

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Date of creation: Jul 2004
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Handle: RePEc:nbr:nberwo:10616

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