Yield curve and the business cycle in conventional times

Roman Sustek

No 2122, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: A parsimonious model offers an interpretation of lead-lag cyclical dynamics of the yield curve. Low levels of nominal interest rates and inflation, but a steeper yield curve, observed typically ahead of an expansion reflect news about higher future output growth. If investors use bond markets mainly to hedge risk, the news is only weakly transmitted into real interest rates, but a Taylor rule transmits it into lower inflation. A steeper yield curve reflects higher risk premia when the positive news is accompanied by elevated uncertainty about the future growth path. The mechanism conforms with other important term structure moments.

Keywords: Term structure of interest rates; business cycle; recursive preferences; stochastic volatility (search for similar items in EconPapers)
JEL-codes: E32 E43 E52 G12 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2021-10
New Economics Papers: this item is included in nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2122

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