Interest Rates under Falling Stars

Michael Bauer and Glenn Rudebusch

American Economic Review, 2020, vol. 110, issue 5, 1316-54

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 term 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 in determining interest rates. The model also provides new, more plausible estimates of the term premium and accurate out-of-sample yield forecasts.

JEL-codes: E31 E43 E47 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (56)

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Working Paper: Interest Rates Under Falling Stars (2019)
Working Paper: Interest Rates Under Falling Stars (2017)
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DOI: 10.1257/aer.20171822

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