Working Paper: CEPR ID: DP8063
Authors: Sylvester C.W. Eijffinger; Ronald Mahieu; Louis Raes
Abstract: We study the bond yield conundrum in a macro-finance framework. Building upon a flexible and non-structural macro-finance model, we test the hypothesis that the bond yield conundrum is connected to various sources of uncertainty in the financial markets. Moreover we explicitly test for the role of the state of the economy. Our findings give a richer description of the drivers of the term premium yet the conundrum remains. The results in this paper indicate that the underlying observable drivers of the term premium are not yet fully understood.
Keywords: affine models; monetary policy; term premium; yield curve
JEL Codes: E43; E44; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bond yield conundrum (E43) | uncertainties in financial markets (G19) |
| rising energy prices (Q41) | long-term interest rates (E43) |
| deteriorating fiscal conditions (H69) | long-term interest rates (E43) |
| observable macroeconomic conditions (E66) | long-term interest rates (E43) |
| volatility in oil prices (Q47) | bond yields (G12) |
| government spending (H59) | bond yields (G12) |
| state of the economy (E66) | significance of variables (C29) |