The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach
Rodney L. White Center for Financial Research Working Paper No. 16-04
41 Pages Posted: 8 Jul 2004
Date Written: May 2004
We estimate a model that summarizes the yield curve using latent factors (specifically, level, slope and curvature) and also includes observable macroeconomic variables (specifically, real activity, inflation, and the monetary policy instrument). Our goal is to provide a characterization of the dynamic interactions between the macroeconomy and the yield curve. We find strong evidence of the effects of macro variables on future movements in the yield curve and evidence for a reverse influence as well. We also relate our results to the expectations hypothesis.
Keywords: Term structure, interest rates, macroeconomic fundamentals, factor model, state-space model
JEL Classification: G1, E4, C5
Suggested Citation: Suggested Citation