News shocks and the slope of the term structure of interest rates

André Kurmann and Christopher Otrok

No 2012-011, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates. We find that one single shock can explain the majority of all unpredictable movements in the slope over a 10-year forecast horizon. Impulse response functions lead us to interpret this shock as news about future total factor productivity (TFP). We confirm this interpretation formally by identifying a TFP news shock following recent work by Barsky and Sims (2011). By showing that the 'slope shock' and the 'TFP news shock' are closely related, we provide a new explanation for the relationship between the slope of the term structure and macroeconomic fundamentals and for why the yield curve is one of the most reliable predictors of future economic growth. Our results also provide a new empirical benchmark for structural models at the intersection of macroeconomics and finance.

Keywords: Interest rates; Vector autoregression (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: News Shocks and the Slope of the Term Structure of Interest Rates (2013)
Working Paper: News Shocks and the Slope of the Term Structure of Interest Rates (2010)
Working Paper: News Shocks and the Slope of the Term Structure of Interest Rates (2010)
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