Macro Factors and the Affine Term Structure of Interest Rates

This paper formulates an affine term structure model of bond yields from a dynamic stochastic general equilibrium model, with observable macro state variables as the term structure factors. Model implications for the joint macro-term structure dynamics are consistent with the empirical patterns from the VAR estimation. Model calibration and simulation exercises also provide clear macroeconomic interpretations of the latent term structure factors as found in the finance literature: most of the "slope" factor movement can be explained by exogenous monetary policy shocks, and the "level" factor movement is closely related to the technology shocks.