I formulate an affine term structure model of bond yields from a general equilibrium business-cycle model, with observable macro state variables of the structural economy as the factors. The factor representing monetary policy is strongly mean-reverting, and its influence on the term structure is primarily through changing the slope of the yield curve. The factor representing technology is more persistent, and it affects the term structure by shifting the level of the yield curve. The dynamic implications of the model for the macro economy and the term structure are consistent with the broad empirical patterns. From simulation studies of the macro-factor model I can extract the "level" and "slope" factors, similar to the ones extracted from the empirical term structure estimations. Simulation studies also show that the movement of the "slope" factor is primarily driven by the monetary-policy innovations, and the changes of the "level" factor is more closely associated with the aggregate-supply shocks from the private sector.
Wu, Tao. 2002. “Macro Factors and the Affine Term Structure of Interest Rates,” Federal Reserve Bank of San Francisco Working Paper 2002-06. Available at https://doi.org/10.24148/wp2002-06