Interest Rates Under Falling Stars

Michael Bauer and Glenn Rudebusch

No 2017-16, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Macro-finance theory implies that trend inflation and the equilibrium real interest rate are fundamental determinants of the yield curve. However, empirical models of the terms structure of interest rates generally assume that these fundamentals are constant. We show that accounting for time variation in these underlying long-run trends is crucial for understanding the dynamics of Treasury yields and predicting excess bond returns. We introduce a new arbitrage-free model that captures the key role that long-run trends play for interest rates. The model also provides new, more plausible estimates of the term premium and accurate out-of-sample yield forecasts.

JEL-codes: E43 E44 E47 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2019-10-23
New Economics Papers: this item is included in nep-mac and nep-mon
Note: The first version of this paper was published July 10, 2017.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.frbsf.org/economic-research/files/wp2017-16.pdf Full text - article PDF (application/pdf)

Related works:
Journal Article: Interest Rates under Falling Stars (2020)
Working Paper: Interest Rates Under Falling Stars (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2017-16

Ordering information: This working paper can be ordered from

DOI: 10.24148/wp2017-16

Access Statistics for this paper

More papers in Working Paper Series from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library ().