Equilibrium Yield Curves with Imperfect Information

Hiroatsu Tanaka
Additional contact information
Hiroatsu Tanaka: https://www.federalreserve.gov/econres/hiroatsu-tanaka.htm

No 2022-086, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: I study the dynamics of default-free bond yields and term premia using a novel equilibrium term structure model with a New-Keynesian core and imperfect information about productivity. The model generates term premia that are on average positive with sizable countercyclical variation that arises endogenously. Importantly, demand shocks, in addition to supply shocks, play a key role in the dynamics of term premia. This is in sharp contrast to existing DSGE term structure models with perfect information, which tend to rely on large supply shocks to generate timevariation in yields and term premia. With imperfect information, a shock to productivity is a supply shock, while a shock to signals about productivity that do not lead to actual changes in productivity acts as a demand shock. Nevertheless, an increase in economic activity generates more information about productivity, regardless of which type of shock it arises from. Moreover, a decrease in economic uncertainty leads to a decline in term premia as longer-term bonds are risky on average. This feature helps reconcile the empirical evidence that term premia have been on average positive and countercyclical, with numerous studies pointing to demand shocks as being an important driver of business cycles over the last few decades.

Keywords: Term Premium; Term Structure of Interest Rates; Yield Curve; DSGE Model; Imperfect Information; Learning (search for similar items in EconPapers)
JEL-codes: D83 E12 E32 E43 E44 E52 G12 (search for similar items in EconPapers)
Pages: 50 p.
Date: 2022-12
New Economics Papers: this item is included in nep-dge and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.federalreserve.gov/econres/feds/files/2022086pap.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2022-86

DOI: 10.17016/FEDS.2022.086

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().