Macroeconomics and the Term Structure

68 Pages Posted: 14 Nov 2010

See all articles by Refet S. Gürkaynak

Refet S. Gürkaynak

Bilkent University - Department of Economics

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Date Written: September 2010

Abstract

This paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance. The topic is important to investors and also to policymakers, who wish to extract macroeconomic expectations from longer-term interest rates, and take actions to influence those rates. The simplest model of the term structure is the expectations hypothesis, which posits that long-term interest rates are expectations of future average short-term rates. In this paper, we show that many features of the configuration of interest rates are puzzling from the perspective of the expectations hypothesis. We review models that explain these anomalies using time-varying risk premia. Although the quest for the fundamental macroeconomic explanations of these risk premia is ongoing, inflation uncertainty seems to play a large role. Finally, while modern finance theory prices bonds and other assets in a single unified framework, we also consider an earlier approach based on segmented markets. Market segmentation seems important to understand the term structure of interest rates during the recent financial crisis.

Keywords: affine models, expectations hypothesis, financial crisis, inflation, interest rates, segmented markets, Term structure

JEL Classification: C32, E43, E44, E58, G12

Suggested Citation

Gürkaynak, Refet S. and Wright, Jonathan H., Macroeconomics and the Term Structure (September 2010). CEPR Discussion Paper No. DP8018, Available at SSRN: https://ssrn.com/abstract=1707908

Refet S. Gürkaynak (Contact Author)

Bilkent University - Department of Economics ( email )

06533 Ankara
Turkey

Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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