Working Paper: NBER ID: w11089
Authors: Francis X. Diebold; Monika Piazzesi; Glenn D. Rudebusch
Abstract: From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affne no-arbitrage term structure models.
Keywords: No keywords provided
JEL Codes: G1; E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-term interest rate (E43) | long-term bond yields (E43) |
| macroeconomic conditions (E66) | yield curve shapes (E43) |
| inflation (E31) | bond yields (G12) |
| real activity (E23) | bond yields (G12) |
| macroeconomic conditions (E66) | bond yields (E43) |
| no-arbitrage restrictions (G19) | yield curve dynamics (E43) |