Macroeconomics and the Term Structure
Refet S. Gürkaynak
Jonathan H. Wright
Journal of Economic Literature
no. 2, June 2012
This paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance. The topic is important to investors and also to policymakers, who wish to extract macroeconomic expectations from longer-term interest rates, and take actions to influence those rates. The simplest model of the term structure is the expectations
hypothesis, which posits that long-term interest rates are expectations of future average short-term rates. In this paper, we show that many features of the configuration of interest rates are puzzling from the perspective of the expectations hypothesis. We review models that explain these anomalies using time-varying risk premia. Although
the quest for the fundamental macroeconomic explanations of these risk premia is ongoing, inflation uncertainty seems to play a large role. Finally, while modern finance theory prices bonds and other assets in a single unified framework, we also consider an earlier approach based on segmented markets. Market segmentation seems important to understand the term structure of interest rates during the recent financial crisis. (JEL E31, E43, E52, E58)
Gürkaynak, Refet S., and Jonathan H. Wright.
"Macroeconomics and the Term Structure."
Journal of Economic Literature,
Price Level; Inflation; Deflation
Interest Rates: Determination, Term Structure, and Effects
Central Banks and Their Policies