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Macroeconomic linkages between monetary policy and the term structure of interest rates


Journal of Financial Economics



Authors / Editors

Kung H


Publication Year



This paper studies the equilibrium term structure of nominal and real interest rates and time-varying bond risk premia implied by a stochastic endogenous growth model with imperfect price adjustment. The production and price-setting decisions of firms drive low-frequency movements in growth and inflation rates that are negatively related. With recursive preferences, these growth and inflation dynamics are crucial for rationalizing key stylized facts in bond markets. When calibrated to macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields and the failure of the expectations hypothesis.


Term structure of interest rates; asset pricing; recursive preferences; monetary policy; endogenous growth; inflation; productivity

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