Macro Risks and the Term Structure of Interest Rates

Geert Bekaert, Eric Engstrom and Andrey Ermolov

No 22839, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We extract aggregate supply and aggregate demand shocks for the US economy from macroeconomic data on inflation, real GDP growth, core inflation and the unemployment gap. We first use unconditional non-Gaussian features in the data to achieve identification of these structural shocks while imposing minimal economic assumptions. We find that recessions in the 1970s and 1980s are better characterized as driven by supply shocks while later recessions were driven primarily by demand shocks. The Great Recession exhibited large negative shocks to both demand and supply. We then use conditional (time-varying) non-Gaussian features of the structural shocks to estimate "macro risk factors" for supply and demand shocks that drive "bad" (negatively skewed) and "good" (positively skewed) variation for supply and demand shocks. The Great Moderation, a general decline in the volatility of many macroeconomic time series since the 1980s, is mostly accounted for by a reduction in the good demand variance risk factor. In contrast, the risk factors driving bad variance for both supply and demand shocks, which account for most recessions, show no secular decline. Finally, we find that macro risks significantly contribute to the variation in yields, bond risk premiums and the term premium. While overall bond risk premiums are counter-cyclical, an increase in bad demand variance is associated with lower risk premiums on bonds.

JEL-codes: E31 E32 E43 E44 G12 G13 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-mac
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as Bekaert, Geert & Engstrom, Eric & Ermolov, Andrey, 2021. "Macro risks and the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 141(2), pages 479-504.

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Related works:
Journal Article: Macro risks and the term structure of interest rates (2021)
Working Paper: Macro Risks and the Term Structure of Interest Rates (2017)
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