Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/167557
Authors: 
Bauer, Michael D.
Rudebusch, Glenn D.
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6571
Abstract: 
Theory predicts that the equilibrium real interest rate, r*t, and the perceived trend in inflation, ð*t, are key determinants of the term structure of interest rates. However, term structure analyses generally assume that these endpoints are constant. Instead, we show that allowing for time variation in both r*t and ð*t is crucial for understanding the empirical dynamics of U.S. Treasury yields and risk pricing. Our evidence reveals that accounting for fluctuations in both r*t and ð*t substantially increases the accuracy of long-range interest rate forecasts, helps predict excess bond returns, improves estimates of the term premium in long-term interest rates, and captures a substantial share of interest rate variability at low frequencies.
Subjects: 
yield curve
macro-finance
inflation trend
equilibrium real interest rate
shifting endpoints
bond risk premia
JEL: 
E43
E44
E47
Document Type: 
Working Paper

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