Secular Economic Changes and Bond Yields

Abstract We build a model of bond yields in an economy with secular changes to inflation, real rate and output growth. Long-run restrictions identify nominal shocks that do not influence the long-run real rate and output growth. Before the anchoring of inflation around the mid-1990s, nominal shocks lifted the output gap and inflation. This led to a higher and steeper yield curve because the short rate was expected to peak after several quarters, following declines in the responses of growth and inflation. With inflation anchored, nominal shocks have small impacts on inflation, output and bond yields, mostly via the term premium.

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Measuring the Output Gap using Large Datasets

Review of Economics and Statistics ◽

10.1162/rest_a_01119 ◽

2021 ◽

pp. 1-45

Author(s):

Matteo Barigozzi ◽

Matteo Luciani

Keyword(s):

Factor Model ◽

Theoretical Models ◽

Output Growth ◽

Output Gap ◽

Dynamic Factor ◽

Dynamic Factor Model ◽

Goods And Services ◽

Long Run ◽

Slow Drift ◽

Macroeconomic Indicators

Abstract We propose a new measure of the output gap based on a dynamic factor model that is estimated on a large number of U.S. macroeconomic indicators and which incorporates relevant stylized facts about macroeconomic data (co-movements, non-stationarity, and the slow drift in long-run output growth over time). We find that, (1) from the mid-1990s to 2008, the U.S. economy operated above its potential; and, (2) in 2018:Q4, the labor market was tighter than the market for goods and services. Because it is mainly data-driven, our measure is a natural complementary tool to the theoretical models used at policy institutions.

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IS BUSINESS CYCLE ASYMMETRY INTRINSIC IN INDUSTRIALIZED ECONOMIES?

Macroeconomic Dynamics ◽

10.1017/s1365100518000913 ◽

2019 ◽

Vol 24 (6) ◽

pp. 1403-1436 ◽

Cited By ~ 5

Author(s):

James Morley ◽

Irina B. Panovska

Keyword(s):

Business Cycle ◽

Model Uncertainty ◽

Phillips Curve ◽

Capacity Utilization ◽

Output Growth ◽

Underlying Structure ◽

Output Gap ◽

Cycle Asymmetry ◽

Long Run ◽

Intrinsic Characteristic

We consider a model-averaged forecast-based estimate of the output gap to measure economic slack in 10 industrialized economies. Our measure takes changes in the long-run growth rate into account and, by addressing model uncertainty using equal weights on different forecast-based estimates, is robust to different assumptions about the underlying structure of the economy. For all 10 countries in the sample, we find that the estimated output gap has much larger negative movements during recessions than positive movements in expansions, suggesting business cycle asymmetry is an intrinsic characteristic of industrialized economies. Furthermore, the estimated output gap is always strongly negatively correlated with future output growth and unemployment and positively correlated with capacity utilization. It also implies a convex Phillips Curve in many cases. The model-averaged output gap is reliable in real time in the sense of being subject to relatively small revisions.

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Interest Rates under Falling Stars

The American Economic Review ◽

10.1257/aer.20171822 ◽

2020 ◽

Vol 110 (5) ◽

pp. 1316-1354 ◽

Cited By ~ 14

Author(s):

Michael D. Bauer ◽

Glenn D. Rudebusch

Keyword(s):

Interest Rates ◽

Term Structure ◽

Yield Curve ◽

Term Premium ◽

Long Run ◽

Trend Inflation ◽

Bond Returns ◽

Out Of Sample ◽

Finance Theory ◽

Macro Finance

Macro-finance theory implies that trend inflation and the equilibrium real interest rate are fundamental determinants of the yield curve. However, empirical models of the term structure of interest rates generally assume that these fundamentals are constant. We show that accounting for time variation in these underlying long-run trends is crucial for understanding the dynamics of Treasury yields and predicting excess bond returns. We introduce a new arbitrage-free model that captures the key role that long-run trends play in determining interest rates. The model also provides new, more plausible estimates of the term premium and accurate out-of-sample yield forecasts. (JEL E31, E43, E47)

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Long-Run Consumption Risk and the Real Yield Curve

SSRN Electronic Journal ◽

10.2139/ssrn.1130087 ◽

2008 ◽

Cited By ~ 4

Author(s):

Shu Wu

Keyword(s):

Yield Curve ◽

The Real ◽

Long Run ◽

Consumption Risk

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A Note Concerning the Dynamics of Government Bond Yields

The American Economist ◽

10.1177/0569434520988275 ◽

2021 ◽

pp. 056943452098827

Author(s):

Tanweer Akram

Keyword(s):

Interest Rate ◽

Financial Markets ◽

Yield Curve ◽

Empirical Studies ◽

State Theory ◽

Government Bond ◽

Bond Yields ◽

Short Term ◽

Government Bonds

Keynes argued that the central bank can influence the long-term interest rate on government bonds and the shape of the yield curve mainly through the short-term interest rate. Several recent empirical studies that examine the dynamics of government bond yields not only substantiate Keynes’s view that the long-term interest rate responds markedly to the short-term interest rate but also have relevance for macroeconomic theory and policy. This article relates Keynes’s discussions of money, the state theory of money, financial markets, investors’ expectations, uncertainty, and liquidity preference to the dynamics of government bond yields for countries with monetary sovereignty. Investors’ psychology, herding behavior in financial markets, and uncertainty about the future reinforce the effects of the short-term interest rate and the central bank’s monetary policy actions on the long-term interest rate. JEL classifications: E12; E40; E43; E50; E58; E60; F30; G10; G12; H62; H63

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Determinants of Treasury-LIBOR Swap Spreads

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091505000567 ◽

2005 ◽

Vol 08 (04) ◽

pp. 687-705 ◽

Cited By ~ 3

Author(s):

D. K. Malhotra ◽

Vivek Bhargava ◽

Mukesh Chaudhry

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Default Risk ◽

Yield Curve ◽

Short Term ◽

Long Run ◽

Interest Rate Volatility ◽

Short Run ◽

Using Data ◽

Swap Spreads

Using data from the Treasury versus London Interbank Offer Swap Rates (LIBOR) for October 1987 to June 1998, this paper examines the determinants of swap spreads in the Treasury-LIBOR interest rate swap market. This study hypothesizes Treasury-LIBOR swap spreads as a function of the Treasury rate of comparable maturity, the slope of the yield curve, the volatility of short-term interest rates, a proxy for default risk, and liquidity in the swap market. The study finds that, in the long-run, swap spreads are negatively related to the yield curve slope and liquidity in the swap market. We also find that swap spreads are positively related to the short-term interest rate volatility. In the short-run, swap market's response to higher default risk seems to be higher spread between the bid and offer rates.

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Understanding the Real Rate Conundrum: An Application of No-Arbitrage Models to the UK Real Yield Curve*

Review of Finance ◽

10.1093/rof/rfr012 ◽

2011 ◽

Vol 16 (3) ◽

pp. 837-866 ◽

Cited By ~ 10

Author(s):

Michael A. S. Joyce ◽

Iryna Kaminska ◽

Peter Lildholdt

Keyword(s):

Yield Curve ◽

Real Rate ◽

No Arbitrage ◽

The Real ◽

The Uk

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Human capital accumulation, income distribution, and economic growth: a demand-led analytical framework

Review of Keynesian Economics ◽

10.4337/roke.2021.03.02 ◽

2021 ◽

Vol 9 (3) ◽

pp. 319-336

Author(s):

Gilberto Tadeu Lima ◽

Laura Carvalho ◽

Gustavo Pereira Serra

Keyword(s):

Human Capital ◽

Capital Accumulation ◽

Analytical Framework ◽

Output Growth ◽

Human Capital Accumulation ◽

Capital Utilization ◽

Tax Rate ◽

Long Run ◽

The Impact ◽

Long Run Equilibrium

This paper incorporates human capital accumulation through provision of universal public education by a balanced-budget government to a demand-driven analytical framework of functional distribution and growth of income. Human capital accumulation positively impacts on workers’ productivity in production and their bargaining power in wage negotiations. In the long-run equilibrium, a rise in the tax rate (which also denotes the share of output spent in human capital formation) lowers the pre- and after-tax wage share and physical capital utilization, and thus raises (lowers) the output growth rate when the latter is profit-led (wage-led). The impact of a higher tax rate on the employment rate (which also measures human capital utilization) in the long-run equilibrium is negative (ambiguous) when output growth is wage-led (profit-led). In any case, the supply of higher-skilled workers does not automatically create its own demand.

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Liquidity-Adjusted Benchmark Yield Curves: A Look at Trading Concentration and Information

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091507001173 ◽

2007 ◽

Vol 10 (04) ◽

pp. 491-518 ◽

Cited By ~ 3

Author(s):

William T. Lin ◽

David S. Sun

Keyword(s):

Term Structure ◽

Yield Curve ◽

Information Discovery ◽

Affine Term Structure ◽

Term Structure Model ◽

Long Run ◽

Fitting Method ◽

Bond Issues ◽

Short Run

Estimation of benchmark yield curve in developing markets is often influenced by liquidity concentration. Based on an affine term structure model, we develop a long run liquidity weighted fitting method to address the trading concentration phenomenon arising from horizon-induced clientele equilibrium as well as information discovery. Specifically, we employ arguments from models of liquidity concentration and benchmark security information. After examining time series behavior of price errors against our fitted model, we find results consistent with both the horizon and information hypotheses. Our evidence indicates that trading liquidity carries information effect in the long run, which cannot be fully captured in the short run. Trading liquidity plays a key role in long run term structure fitting. Markets for liquid benchmark government bond issues collectively form a long term equilibrium. Compared with previous studies, our results provide a robust and realistic characterization of the spot rate term structure and related price forecasting over time, which in turn help portfolio investment of fixed income and long run pricing of financial instruments.

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Research On Monetary Neutrality: Evidence From Exchange Rate And Trade Balance Of G-7 Countries

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v24i2.1351 ◽

2011 ◽

Vol 24 (2) ◽

Cited By ~ 1

Author(s):

Doh-Khul Kim

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Trade Balance ◽

Monetary Shocks ◽

Font Size ◽

Long Run ◽

Short Period ◽

Short Run ◽

Monetary Neutrality ◽

Nominal Shocks

According to a recent paper by Fisher and Huh (2002), in contrast to a long-run neutrality hypothesis, nominal shocks have long-run effects on a country’s real exchange rate and trade balance. However employing a similar method (VAR) with identical restrictions (long-run neutrality and short-run recursive hypotheses), this paper shows that the effects on the real exchange rate are much shorter in this G-7 country study than what Fisher and Huh (2002) contend. Further, the trade balance improves for a short period of time, from which it can conclude there is a shorter existence of the depreciation effect in response to expansionary monetary shocks, which supports the long-run neutrality hypothesis in an open macroeconomic framework.

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