The New Keynesian Model and Bond Yields

Publikation: Working paper/Preprint Working paperForskning

420 Downloads (Pure)

Abstract

This paper presents a New Keynesian model to capture the linkages between macro fundamentals and the nominal yield curve. The model explains bond yields with a low level of news in expected inflation and plausible term premia. This implies that the slope of the yield curve predicts future bond returns, and that risk-adjusted historical bond returns satisfy the expectations hypothesis. A key implication of the model is that U.S. bond yields are consistent with demand shocks that are three times less inflationary than implied by a standard log-linearized New Keynesian model estimated without bond yields.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider41
StatusUdgivet - 9 jan. 2021
NavnCREATES Research Paper
Nummer2021-01

Emneord

  • Inflation variance ratios
  • Robust structural estimation
  • Term premia
  • The expectations hypothesis
  • Unspanned macro variation

Citationsformater