The New Keynesian Model and Bond Yields

Martin M. Andreasen ()
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Martin M. Andreasen: Aarhus University and CREATES and The Danish Finance Institute, Postal: Department of Economics and Business Economics, Fuglesangs Alle 4, 8210 Aarhus V

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper presents a New Keynesian model to capture the linkages between macro fundamentals and the nominal yield curve. The model explains bond yields with a low level of news in expected inflation and plausible term premia. This implies that the slope of the yield curve predicts future bond returns, and that risk-adjusted historical bond returns satisfy the expectations hypothesis. A key implication of the model is that U.S. bond yields are consistent with demand shocks that are three times less inflationary than implied by a standard log-linearized New Keynesian model estimated without bond yields.

Keywords: Inflation variance ratios; Robust structural estimation; Term premia; The expectations hypothesis; Unspanned macro variation (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
Pages: 41
Date: 2021-01-09
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2021-01

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