Yield curve or term structure of interest rates
represents the relationship between the maturities and the yields of government securities.
(22) However, although our model examines the case of yields, there is an important distinction between our methodology and previous models from the term structure of interest rates
"The Term Structure of Interest Rates
in a DSGE Model", [National Bank of Belgium, Working Paper Research No.
So, having a methodology that permits to forecast the term structure of interest rates
, taking into account those models that regulators ask market agents to respect, is of extreme relevance.
Nowman, "Gaussian estimation of single-factor continuous time models of the term structure of interest rates
," Journal of Finance, vol.
Wachter, "A consumption-based model of the term structure of interest rates
," Journal of Financial Economics 79:365-399, February 2006.
The yield curve is the term structure of interest rates
and as such mathematically begins with short rates.
Using this approach, we find that contrary to what the previous VAR studies show, the Federal Reserve can meaningfully influence the entire term structure of interest rates
. We also find, however, that Federal Reserve can do so only if it maintains its inflation-fighting credibility.
Shocks to the net supply of, or demand for, bonds of one maturity do not affect other yields, nor the shape of the term structure of interest rates
. Early empirical studies that tested this condition in the U.S.
Ross, 1985, "A Theory of the Term Structure of Interest Rates
," Econometrica 53, 385-407.
In the last decades the use of the term structure of interest rates
has been one of the most important topics of research in macroeconomics and finance.