Working Paper: NBER ID: w21576
Authors: Peter N. Ireland
Abstract: 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.
Keywords: monetary policy; bond risk premia; economy; quantitative easing; interest rates
JEL Codes: E32; E43; E44; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Bond risk premia (G12) |
| Monetary policy tightenings (E52) | Bond risk premia (G12) |
| Monetary policy easings (E52) | Bond risk premia (G12) |
| Bond risk premia (G12) | Output growth (O40) |
| Bond risk premia (G12) | Inflation (E31) |
| Lower bond risk premia (G12) | Faster output growth (O49) |
| Lower bond risk premia (G12) | Faster inflation (E31) |
| Federal Reserve actions to lower long-term rates (E43) | Term or risk premia (E43) |
| Bond risk premia (G12) | Short-term interest rate (E43) |