The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach

Francis X. Diebold, Glenn D. Rudebusch, S. Boragan Aruoba

NBER Working Paper No. 10616
Issued in July 2004
NBER Program(s):   EFG   ME   AP

We estimate a model that summarizes the yield curve using latent factors (specifically, level, slope, and curvature) and also includes observable macroeconomic variables (specifically, real activity, inflation, and the monetary policy instrument). Our goal is to provide a characterization of the dynamic interactions between the macroeconomy and the yield curve. We find strong evidence of the effects of macro variables on future movements in the yield curve and evidence for a reverse influence as well. We also relate our results to the expectations hypothesis.

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Published: Diebold, Francis S., Glenn D. Rudebusch and S. Borag'an Aruoba. "The Macroeconomy And The Yield Curve: A Dynamic Latent Factor Approach," Journal of Econometrics, 2006, v131(1-2,Mar-Apr), 309-338.

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