Structural change and the bond yield conundrum

Marco Taboga ()

MPRA Paper from University Library of Munich, Germany

Abstract: In recent years, US and euro area long-term bond yields experienced a remarkable decline and remained at historically low levels even in the face of rising short-term rates. This unusual phenomenon (the so called ”conundrum”) has been the subject of numerous debates and extensive research. The most commonly held opinion is that it was primarily driven by an unprecedented reduction in risk premia. I partly counter this view by showing that, although risk premia played an important role in the ”conundrum” episode, other two equally important forces were at play, i.e. a decline in the real natural rate of interest and a structural reduction in inflation expectations. I use a small-scale macroeconometric model to provide evidence that structural changes in the economy lowered expectations about the future path of short-term policy rates and that, although risk premia did diminish, their current level is not unusual if considered from an historical perspective.

JEL-codes: G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2007-07
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