The Yield Curve and Macroeconomic Dynamics*


  • *

     We thank Isabel Correia, Monika Piazzesi, Mehmet Pasaogullari, Federico Ravenna, Frank Schorfeide, Simeon Tsonev and seminar participants at the ESWC 2005 for useful comments and suggestions. A previous version of this article, entitled ‘Monetary policy and the yield curve,’ was presented at the Society for Computational Economics 2004 Conference in Amsterdam. The opinions expressed are personal and should not be attributed to the Bank for International Settlements or the European Central Bank.


We show that microfounded DSGE models with nominal rigidities can be successful in replicating features of bond yield data, including sizeable term premia and volatile long-term yields, which have previously been considered puzzling in general equilibrium frameworks. At the same time, sample moments of consumption growth and inflation can be fit relatively well. The improved model performance does not arise directly from the presence of nominal rigidities. However, this feature introduces (short-run) monetary non-neutrality, so that monetary policy affects consumption dynamics and bond prices. A high degree of ‘interest rate smoothing’ in the policy rule is essential for our results.