Secular Economic Changes and Bond Yields

62 Pages Posted: 10 Jan 2020 Last revised: 14 Sep 2021

Date Written: March 11, 2020


We build a model for bond yields based on a small-scale representation of the economy with secular declines of inflation, real rate and output growth. Long-run restrictions identify nominal shocks that influence long-run inflation but do not influence the long-run real rate and output growth. These nominal shocks have loadings that can change over time. The results show that, before the anchoring of inflation around the mid-1990s, nominal shocks lifted the output gap and inflation leading to higher yields and a steeper yield curve via higher short-rate expectations and the term premium. The short rate peaked after several quarters, only after the responses of growth and inflation started to decline. With inflation anchored, however, nominal shocks have a short-lived impact on inflation, insignificant impact on output and only a small impact on bond yields via the term premium.

Keywords: Term Structure, Macro-Finance, Secular Changes

JEL Classification: E43, G12

Suggested Citation

Feunou, Bruno and Fontaine, Jean-Sebastien, Secular Economic Changes and Bond Yields (March 11, 2020). Review of Economics and Statistics, Forthcoming, Available at SSRN: or

Bruno Feunou

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
613-782-8302 (Phone)


Jean-Sebastien Fontaine (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9


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