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      Macroeconomics and the term structure

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      Author(s)
      Gürkaynak, R. S.
      Wright, J. H.
      Date
      2012
      Source Title
      Journal of Economic Literature
      Print ISSN
      0022-0515
      Publisher
      American Economic Association
      Volume
      50
      Issue
      2
      Pages
      331 - 367
      Language
      English
      Type
      Article
      Item Usage Stats
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      Abstract
      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.
      Keywords
      Term structure
      Interest rates
      Expectations hypothesis
      Affine models
      Inflation
      Financial crisis
      Segmented markets
      Permalink
      http://hdl.handle.net/11693/38306
      Published Version (Please cite this version)
      http://dx.doi.org/10.1257/jel.50.2.331
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      • Department of Economics 724
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