Interest Rates under Falling Stars

53 Pages Posted: 23 Jan 2020

See all articles by Michael Bauer

Michael Bauer

Universit├Ąt Hamburg

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco

Multiple version iconThere are 2 versions of this paper

Date Written: October 23, 2019


Macro-finance theory implies that trend ination and the equilibrium real interest rate are fundamental determinants of the yield curve. However, empirical models of the term structure of interest rates generally assume that these fundamentals are constant. We show that accounting for time variation in these underlying long-run trends is crucial for understanding the dynamics of Treasury yields and predicting excess bond returns. We introduce a new arbitrage-free model that captures the key role that long-run trends play in determining interest rates. The model also provides new, more plausible estimates of the term premium and accurate out-of-sample yield forecasts.

Keywords: Yield Curve, Macro-Finance, Inflation Trend, Equilibrium Real Interest Rate, Shifting Endpoints, Bond Risk Premia

JEL Classification: E430, E440, E470

Suggested Citation

Bauer, Michael and Rudebusch, Glenn D., Interest Rates under Falling Stars (October 23, 2019). CESifo Working Paper Series No. 6571, Available at SSRN:

Michael Bauer (Contact Author)

Universit├Ąt Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146


Glenn D. Rudebusch

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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