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The term structure of expectations and bond yields

Richard Crump (), Stefano Eusepi () and Emanuel Moench ()

No 775, Staff Reports from Federal Reserve Bank of New York

Abstract: Bond yields can be decomposed into expected short rates and term premiums. We directly measure the former using all available U.S. professional forecasts and obtain the latter as the difference between bond yields and survey-based expected short rates. While the behavior of nominal and real short rate expectations is consistent with standard macroeconomic theory, term premiums account for the bulk of the cross-sectional and time series variation in yields. They also largely explain the yield curve's reaction to a host of structural economic shocks. This dramatic failure of the expectations hypothesis highlights the importance of term premiums for macro-financial transmission.

Keywords: term premiums; expectations formation; survey forecasts; monetary policy; business cycle fluctuations (search for similar items in EconPapers)
JEL-codes: D84 E44 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2016-05-01, Revised 2018-04-01
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