Monetary Policy, Bond Risk Premia, and the Economy
This paper develops an affine model of the term structure of interest rates in which bond yields are driven by observable and unobservable macroeconomic factors. It imposes restrictions to identify the effects of monetary policy and other structural disturbances on output, inflation, and interest rates and to decompose movements in long-term rates into terms attributable to changing expected future short rates versus risk premia. The estimated model highlights a broad range of channels through which monetary policy affects risk premia and the economy, risk premia affect monetary policy and the economy, and the economy affects monetary policy and risk premia.
I would like to thank Michael Belongia, Anna Cieslak, Urban Jermann, and two anonymous referees for very helpful comments on previous drafts. I received no external support for and have no financial interest that relates to the research described in this paper. The opinions, findings, conclusions, and recommendations expressed herein are my own and do not necessarily reflect those of the Trustees of Boston College or the National Bureau of Economic Research.
Ireland, Peter N., 2015. "Monetary policy, bond risk premia, and the economy," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 124-140. citation courtesy of