Working Papers

2017-16 | November 2017

More


Interest Rates Under Falling Stars

Author(s):

While theory predicts that the equilibrium real interest rate, r*, and the perceived trend in inflation, pi*, are fundamental determinants of the yield curve, macro-finance models generally treat them as constant. We show that accounting for time-varying macro trends is critical for understanding the empirical dynamics of U.S. Treasury yields and risk pricing. It fundamentally changes estimated risk premiums in long-term bond yields, leads to large gains in predictions of excess bond returns and long-range out-of-sample forecasts of interest rates, and captures a substantial share of interest rate variability at low frequencies.

Download PDF (pdf, 517.89 kb)


Article Citation

Bauer, Michael D, and Glenn D. Rudebusch. 2017. "Interest Rates Under Falling Stars," Federal Reserve Bank of San Francisco Working Paper 2017-16. Available at https://doi.org/10.24148/wp2017-16