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

Federal Reserve Bank of St. Louis Working Paper No. 2012-011B

28 Pages Posted: 12 Apr 2012 Last revised: 7 Dec 2012

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: November 30, 2012

Abstract

We adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates. We find that one single shock can explain the majority of all unpredictable movements in the slope over a 10-year forecast horizon. Impulse response functions lead us to interpret this shock as news about future total factor productivity (TFP). We confirm this interpretation formally by identifying a TFP news shock following recent work by Barsky and Sims (2011). By showing that the 'slope shock' and the 'TFP news shock' are closely related, we provide a new explanation for the relationship between the slope of the term structure and macroeconomic fundamentals and for why the yield curve is one of the most reliable predictors of future economic growth. Our results also provide a new empirical benchmark for structural models at the intersection of macroeconomics and finance.

Keywords: News Shocks, Term Structure, Vector Autoregression (VAR)

JEL Classification: G12, E43, E32

Suggested Citation

Kurmann, André and Otrok, Christopher, News Shocks and the Slope of the Term Structure of Interest Rates (November 30, 2012). Federal Reserve Bank of St. Louis Working Paper No. 2012-011B, Available at SSRN: https://ssrn.com/abstract=2038594 or http://dx.doi.org/10.2139/ssrn.2038594

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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