The term premium on nominal long-term bonds in the standard dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to empirical measures obtained from the data - an example of the bond premium puzzle. However, in models of endowment...

In 2004 and 2005, long-term interest rates remained remarkably low despite improving economic conditions and rising short-term interest rates, a situation that former Fed Chairman Alan Greenspan dubbed a conundrum. We document the extent and timing of this conundrum using two empirical...

Linearized New Keynesian models and empirical no-arbitrage macro-finance models offer little insight regarding the implications of changes in bond term premiums for economic activity. We investigate these implications using both a structural model and a reduced-form framework. We show that there...

Estimated monetary policy rules often appear to indicate a sluggish partial adjustment of the policy interest rate by the central bank. In fact, such evidence does not appear to be persuasive, since the illusion of monetary policy inertia may reflect spuriously omitted persistent influences on...

From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint...

This paper examines a recent shift in the dynamics of the term structure and interest rate risk. We first use standard yield-spread regressions to document such a shift in the U.S. in the mid-1980s. Over the pre- and post-shift subsamples, we then estimate dynamic, affine, no-arbitrage models,...

We estimate a model that summarizes the yield curve using latent factors (specifically, level, slope and curvature) and also includes observable macroeconomic variables (specifically, real activity, inflation, and the monetary policy instrument). Our goal is to provide a characterization of the...

This paper develops and estimates a macro-finance model that combines a canonical affine no-arbitrage finance specification of the term structure with standard macroeconomic aggregate relationships for output and inflation. From this new empirical formulation, we obtain several important...

We estimate a model with latent factors that summarize the yield curve (namely, level, slope, and curvature) as well as observable macroeconomic variables (real activity, inflation, and the stance of monetary policy). Our goal is to provide a characterization of the dynamic interactions between...

We derive the class of arbitrage-free affine dynamic term structure models that approximate the widely-used Nelson-Siegel yield-curve specification. Our theoretical analysis relates this new class of models to the canonical representation of the three-factor arbitrage-free affine model. Our...