The macroeconomy and the yield curve: a dynamic latent factor approach

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 dyn...

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Bibliographic Details
Published in:Journal of econometrics 2006-03, Vol.131 (1), p.309-338
Main Authors: Diebold, Francis X., Rudebusch, Glenn D., Boragˇan Aruoba, S.
Format: Article
Language:English
Subjects:
Capital market
Dynamic models
Econometric models
Econometrics
Economic conditions
Estimating techniques
Factor analysis
Factor model
Interest rates
Macroeconomic fundamentals
Macroeconomics
State-space model
Statistical methods
Studies
Term structure
Yield
Yield curve
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Summary: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.
ISSN:0304-4076
1872-6895
DOI:10.1016/j.jeconom.2005.01.011