The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach

40 Pages Posted: 28 Jul 2004 Last revised: 6 Jul 2010

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: July 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.

Suggested Citation

Diebold, Francis X. and Rudebusch, Glenn D. and Aruoba, S. Boragan, The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach (July 2004). NBER Working Paper No. w10616, Available at SSRN: https://ssrn.com/abstract=565168

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 )

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United States
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