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
Date Written: November 30, 2012
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: Suggested Citation