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The Macroeconomy and the Yield Curve: A Nonstructural Analysis

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

Abstract

We estimate a model with latent factors that summarize the yield curve (namely, level, slope, and curvature) as well as observable macroeconomic variables (real activity, inflation, and the stance of monetary policy). 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 much weaker evidence for a reverse influence. We also relate our results to a traditional macroeconomic approach based on the expectations hypothesis. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2003/31.

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Date of creation: 2003
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Handle: RePEc:zbw:cfswop:200331

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Keywords: Yield curve; term structure; interest rates; macroeconomic fundamentals; factor model; state-space model;

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References

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  1. Glenn D. Rudebusch, 2001. "Term structure evidence on interest rate smoothing and monetary policy inertia," Working Paper Series 2001-02, Federal Reserve Bank of San Francisco.
  2. Hans Dewachter & Marco Lyrio, 2003. "Macro Factors and the Term Structure of Interest Rates," International Economics Working Papers Series ces0304, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
  3. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 53-111, December.
  4. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
  5. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  6. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
  7. Peter Hoerdahl & Oreste Tristani, 2004. "A joint econometric model of macroeconomic and term structure dynamics," Econometric Society 2004 North American Summer Meetings 379, Econometric Society.
  8. Lutkepohl, Helmut, 1990. "Asymptotic Distributions of Impulse Response Functions and Forecast Error Variance Decompositions of Vector Autoregressive Models," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 116-25, February.
  9. Glenn Rudebusch & Tao Wu, 2004. "A macro-finance model of the term structure, monetary policy, and the economy," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  10. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
  11. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
  12. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
  13. Andrew Ang & Monika Piazzesi & Min Wei, 2003. "What does the yield curve tell us about GDP growth?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  14. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
  15. Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
  16. Björk, Tomas & Christensen, Bent Jesper, 1997. "Interest Rate Dynamics and Consistent Forward Rate Curves," Working Paper Series in Economics and Finance 209, Stockholm School of Economics.
  17. repec:aah:aarmng:1999-4 is not listed on IDEAS
  18. Sharon Kozicki & P.A. Tinsley, 1997. "Shifting endpoints in the term structure of interest rates," Research Working Paper 97-08, Federal Reserve Bank of Kansas City.
  19. Charles L. Evans & David Marshall, 2001. "Economic determinants of the nominal treasury yield curve," Working Paper Series WP-01-16, Federal Reserve Bank of Chicago.
  20. Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. " Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, vol. 49(5), pages 1861-82, December.
  21. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
  22. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2003. "The excess sensitivity of long-term interest rates: evidence and implications for macroeconomic models," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  23. Fuhrer, Jeffrey C, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1183-1209, November.
  24. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
  25. Dahlquist, Magnus & Svensson, Lars E O, 1996. " Estimating the Term Structure of Interest Rates for Monetary Policy Analysis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 163-83, June.
  26. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
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Citations

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Cited by:
  1. Glenn D. Rudebusch & Tao Wu, 2003. "A macro-finance model of the term structure, monetary policy, and the economy," Working Paper Series 2003-17, Federal Reserve Bank of San Francisco.
  2. Duffee, Gregory R., 2006. "Term structure estimation without using latent factors," Journal of Financial Economics, Elsevier, vol. 79(3), pages 507-536, March.
  3. Peter Spencer, 2007. "Macro volatility in a model of the UK Gilt edged bond market," Money Macro and Finance (MMF) Research Group Conference 2006 73, Money Macro and Finance Research Group.
  4. Marco Lyrio & Hans Dewachter, 2004. "Filtering Long-Run Inflation Expectations with a Structural Macro Model of the Yield Curve," Computing in Economics and Finance 2004 188, Society for Computational Economics.
  5. Daniel L. Thornton, 2005. "Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates," Working Papers 2004-010, Federal Reserve Bank of St. Louis.
  6. Matiur Rahman & Muhammad Mustafa, 2009. "The Slope of the U.S. Nominal Treasury Yield Curve and the Exchange Rate," New York Economic Review, New York State Economics Association (NYSEA), vol. 40(1), pages 3-12.
  7. Kanjilal, Kakali, 2013. "Factors causing movements of yield curve in India," Economic Modelling, Elsevier, vol. 31(C), pages 739-751.
  8. Leo Krippner, 2005. "Investigating the Relationships between the Yield Curve, Output and Inflation using an Arbitrage-Free Version of the Nelson and Siegel Class of Yield Curve Models," Working Papers in Economics 05/02, University of Waikato, Department of Economics.
  9. David J. Bolder & Grahame Johnson & Adam Metzler, 2004. "An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates," Working Papers 04-48, Bank of Canada.
  10. Leo Krippner, 2005. "An Intertemporally-Consistent and Arbitrage-Free Version of the Nelson and Siegel Class of Yield Curve Models," Working Papers in Economics 05/01, University of Waikato, Department of Economics.

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