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Macroeconomic factors in the term structure of interest rates when agents learn


  • Thomas Laubach

    (Federal Reserve Board)

  • Robert J. Tetlow

    (Federal Reserve Board)

  • John C. Williams

    (Federal Reserve Bank of San Francisco)


Finance models of the term structure of interest rates have for a long time relied on unobserved factors as explanatory variables. In a seminal paper, Ang and Piazzesi (2003) have examined the potential role of macroeconomic variables in explaining the term structure. They, and subsequent studies, have found that macroeconomic variables such as inflation and real activity have explanatory power for bond yields, but have also found that latent variables still explain a great deal of the variation in bond yields. A limitation of these studies is that they assume that relationships between macroeconomic variables and interest rates are constant over time. Recent research has highlighted the presence of structural breaks among key U.S. macroeconomic variables over the past four decades. Time-invariant macro models may therefore provide poor representations of market participants' expectations of future interest rates. Given the crucial role of expectations for the term structure, this paper focuses on modeling expectations. We use a flexible framework to allow for time variation in agents' forecasting models and pay close attention to the data they were most likely to observe and forecast. We show that the explanatory power of macro factors is dramatically improved in this way. Time variation is shown to be an important feature of the estimates of both intercepts and slope coefficients. These results emphasize the importance of the expectations channel, especially of perceptions about monetary policy, in the transmission of monetary policy

Suggested Citation

  • Thomas Laubach & Robert J. Tetlow & John C. Williams, 2006. "Macroeconomic factors in the term structure of interest rates when agents learn," Computing in Economics and Finance 2006 83, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:83

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    Cited by:

    1. Refet S. G├╝rkaynak & Jonathan H. Wright, 2012. "Macroeconomics and the Term Structure," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 331-367, June.

    More about this item


    term structure of interest rates; affine term structure models; least-squares learning;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy


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