News Shocks and the Slope of the Term Structure of Interest Rates

CIRPEE Working Paper 10-05

42 Pages Posted: 11 Feb 2010

See all articles by André Kurmann

André Kurmann

Drexel University - LeBow College of Business

Chris Otrok

University of Missouri; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Multiple version iconThere are 2 versions of this paper

Date Written: February 9, 2010

Abstract

We provide a new structural interpretation of the relationship between the slope of the term structure of interest rates and macroeconomic fundamentals. We first adopt an agnostic identification approach that allows us to identify the shocks that explain most of the movements in the slope. We find that two shocks are sufficient to explain virtually all movements in the slope. Impulse response functions for the first shock, which explains the majority of the movements in the slope, lead us to interpret this main shock as a news shock about future productivity. We confirm this interpretation by formally identifying such a news shock as in Barsky and Sims (2009) and Sims (2009). We then assess to what extent a New Keynesian DSGE model is capable of generating the observed slope responses to a news shock. We find that augmenting DSGE models with a term structure provides valuable information to discipline the description of monetary policy and the model’s response to news shocks in general.

Keywords: Term structure of interest rates, news, productivity shocks, business cycles, monetary policy

JEL Classification: E30, E43, E52

Suggested Citation

Kurmann, André and Otrok, Christopher, News Shocks and the Slope of the Term Structure of Interest Rates (February 9, 2010). CIRPEE Working Paper 10-05, Available at SSRN: https://ssrn.com/abstract=1550169 or http://dx.doi.org/10.2139/ssrn.1550169

André Kurmann (Contact Author)

Drexel University - LeBow College of Business ( email )

School of Economics
3220 Market Street
Philadelphia, PA 19104
United States

Christopher Otrok

University of Missouri ( email )

118 Professional Building
Columbia, MO 65211
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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