New Keynesian Macroeconomics and the Term Structure


  • We benefited from the comments of two referees, the editor, Pok-Sang Lam, Glenn Rudebusch, Adrian Pagan, and seminar participants at Columbia University, Carleton University, the Korea Development Institute, the University of Navarra, the University of Rochester (Finance Department), Tilburg University, the National Bank of Belgium, the Singapore Management University, the 2004 meeting of the Society for Economic Dynamics in Florence, the 2005 Econometric Society World Congress in London, the 2005 European Finance Association annual meeting in Moscow, and the 2006 EC2 Conference in Rotterdam.


This article complements the structural New Keynesian macro framework with a no-arbitrage affine term structure model. Whereas our methodology is general, we focus on an extended macro model with unobservable processes for the inflation target and the natural rate of output that are filtered from macro and term structure data. We find that term structure information helps generate large and significant parameters governing the monetary policy transmission mechanism. Our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks. The inflation target shock dominates the variation in the “level factor” whereas monetary policy shocks dominate the variation in the “slope and curvature factors.”