Economic Determinants of the Nominal Treasury Yield Curve

Evans, Charles L.; Marshall, David A.

doi:10.2139/ssrn.294942

Cited by 147 publications

(128 citation statements)

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“…For instance, Evans (1987), Plosser (1987) and Engen and Hubbard (2004) find small or insignificant responses of interest rates, while Laubach (2003) and Gale and Orszag (2003) find significant responses. Evans and Marshall (2002) find different responses of interest rates depending on how they identify fiscal shocks. One reason for this lack of success is that macroeconomists have not fully incorporated long term interest rates into their empirical models, and have mainly relied on simple least-squares estimates.…”

Section: Introductionmentioning

confidence: 99%

“…See Barro (1987) for an earlier discussion. Canzoneri, Cumby, and Diba (2002) and Laubach (2003) use projected deficits, and Evans and Marshall (2002) study the response of the yield curve to a range of macroeconomic shocks 2 Dai and Singleton (2003) survey the bond pricing literature. 3 See Gallmeyer, Hollifield, and Zin (2004) and Hördahl, Tristani, and Vestin (2003), among others.…”

Section: Introductionmentioning

confidence: 99%

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Fiscal Policy and the Term Structure of Interest Rates

Dai¹,

Philippon²

2004

SSRN Journal

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Macroeconomists want to understand the effects of fiscal policy on interest rates, while financial economists look for the factors that drive the dynamics of the yield curve. To shed light on both issues, we present an empirical macrofinance model that combines a no-arbitrage affine term structure model with a set of structural restrictions that allow us to identify fiscal policy shocks, and trace the effects of these shocks on the prices of bonds of different maturities. Compared to a standard VAR, this approach has the advantage of incorporating the information embedded in a large cross-section of bond prices. Moreover, the pricing equations provide new ways to assess the model's ability to capture risk preferences and expectations. Our results suggest that government deficits affect long term interest rates, at least temporarily: (i) a one percentage point increase in the deficit to GDP ratio increases the 10-year rate by 35 basis points after 3 years; (ii) this increase is partly due to higher expected spot rates, and partly due to higher risk premia on long term bonds; and (iii) the fiscal policy shocks account for up to 13% of the variance of forecast errors in bond yields.JEL: E0, G0 * We are grateful to Roberto Perotti for sharing his programs with us.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Fiscal Policy and the Term Structure of Interest Rates

Dai¹,

Philippon²

2004

SSRN Journal

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“…5 To initialize the factors and the autoregressive parameters, we use data from McCulloch and Kwon (n.d.) for yields with maturities of 3, 6, 12, 24, 60 and 120 months over the period January 1959 to December 1969. 6 Inflation is measured as monthly changes in the consumer price index, the policy instrument is the federal funds rate and, following Evans and Marshall (2001), the measure of real activity is industrial production which, unlike the capacity utilization rate, is available since 1959. Level : y t (3) + y t (24) + y t (120) /3 Slope : y t (3) − y t (120) Curvature : 2y t (24) − y t (3) − y t (120) These proxies or counterparts are regularly used by finance practitioners and provide a good cross-check on the Bayesian estimates of the yield curve factors.…”

Section: Factorsmentioning

confidence: 99%

Time‐varying yield curve dynamics and monetary policy

Mumtaz

Surico

2009

J of Applied Econometrics

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The dynamics of the US economy are modelled using a time-varying structural vector autoregression that incorporates information from the yield curve. We find important changes in the dynamics of macroeconomic variables such as inflation and the federal funds rate. In addition our results suggest a change in the relationship between the yield curve and macroeconomic variables. The monetary policy shocks of the early 1980s explain a large portion of the persistence of inflation and the level of the yield curve. Shocks to the level of the yield curve account for the persistence of the federal funds rate. We use our time-varying model provides to revisit the evidence on the expectations hypothesis.JEL classification: E44, E52, C15.Keywords: Nelson-Siegel, time variation, inflation expectations, credibility building, evidence on expectations hypothesis. SummarySince the mid-1980's, the US economy has experienced low inflation and stable output growth. A number of recent papers have analysed the dynamics of this 'great-moderation' using systems of equations known as Vector Autoregressions (VARs): a set of equations where the explanatory variables in each equation are the complete set of lagged variables in the system. GDP growth, inflation and the nominal interest rate are the typical variables included in VARs that describe the transmission mechanism of monetary policy. These empirical models are subject to the criticism that they include a limited amount of information. If, in reality, the central bank examines a wider set of variables when setting policy, estimates of the monetary policy shock derived from these small empirical models may be biased-ie not completely disentangled from non-policy shocks. As a consequence an accurate assessment of structural shifts may be hampered.The aim of this paper is to use a VAR model that is less susceptible to this criticism. In particular, we augment the standard three variable VAR with variables that describe the level, slope and curvature of the yield curve.These additional yield curve variables contain information about private sector expectations. This additional information may alleviate the biases referred to above by ensuring that the forward looking aspect of monetary policy is accounted for in our empirical model. In addition, we allow the relationship between the yield curve and the macroeconomy (embodied in our VAR) to change over time. We use this model to investigate how the dynamics of US macroeconomic variables have changed over time and how these changes are related to changing properties of the yield curve.The main results can be summarised as follows. The level of the yield curve is highly correlated with the one-year ahead inflation forecasts of the

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“…A recent series of papers links the latent, or unobserved, factors in affine term structure models to macroeconomic fundamentals (e.g., Ang and Piazessi 2003, Dewachter and Lyrio 2006, Evans and Marshall 2002. A related issue is the macroeconomic source of the time-varying central tendency of the real and nominal short rate in the Balduzzi et al (1998) model.…”

Section: Introductionmentioning

confidence: 99%

Real and nominal UK interest rates, ERM membership, and inflation targeting

Reschreiter

2010

Empir Econ

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This paper models the time-varying mean of the UK real and nominal short-term interest rate. Both rates mean revert to a time-varying central tendency in continuous-time interest rate models. Before and during British membership in the ERM, the mean of the real and nominal short rate have a strong negative correlation. Afterwards, when the UK implemented an inflation targeting policy, the mean of the real and nominal short rate are no longer negatively correlated, but instead have a strong positive correlation. The paper also reports empirical evidence of a relationship between the mean of the real and nominal short rate and inflation in the period before the departure from the ERM.

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Economic Determinants of the Nominal Treasury Yield Curve

Cited by 147 publications

References 35 publications

Fiscal Policy and the Term Structure of Interest Rates

Fiscal Policy and the Term Structure of Interest Rates

Time‐varying yield curve dynamics and monetary policy

Real and nominal UK interest rates, ERM membership, and inflation targeting

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