News Shocks and the Slope of the Term Structure of Interest Rates

André Kurmann · Christopher Mark Otrok

146 citations0/0 files storedAmerican Economic Review

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Market Dynamics and Volatility

Abstract

We adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates. We find that one shock can explain the majority of unpredictable movements in the slope. Impulse response functions lead us to interpret this shock as news about future total factor productivity (TFP). By showing that “slope shocks” are essentially “TFP news shocks” we provide a new explanation for the relationship between the slope and macroeconomic fundamentals. Our results also provide a new empirical benchmark for structural models at the intersection of macroeconomics and finance. (JEL E23, E43, E52, G12, G14)

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References

1993Discretion versus policy rules in practice 2005Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy 1999The Science of Monetary Policy: A New Keynesian Perspective 2007Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach 2000Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles 1996A YIELD‐FACTOR MODEL OF INTEREST RATES 1987Cointegration and Tests of Present Value Models 2002Getting Income Shares Right

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