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

See all articles by Francis X. Diebold

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco

S. Borağan Aruoba

University of Maryland - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2004

Abstract

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

Diebold, Francis X. and Rudebusch, Glenn D. and Aruoba, S. Boragan, The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach (May 2004). Rodney L. White Center for Financial Research Working Paper No. 16-04, Available at SSRN: https://ssrn.com/abstract=562503 or http://dx.doi.org/10.2139/ssrn.562503

Francis X. Diebold (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

National Bureau of Economic Research (NBER)

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Glenn D. Rudebusch

Federal Reserve Bank of San Francisco ( email )

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S. Boragan Aruoba

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
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