The yield curve and the macro-economy across time and frequencies

Abstract

We assess the relation between the yield curve and the macroeconomy in the U.S. between 1961 and 2011. We add to the standard parametric macro-finance models, uncovering evidence simultaneously on the time and frequency domains. We model the shape of the yield curve by latent factors corresponding to its level, slope and curvature. The macroeconomic variables measure real activity, inflation and monetary policy. The tools of wavelet analysis, the set of variables and the length of the sample allow for a thorough appraisal of the time-variation in the direction, intensity, synchronization and periodicity of the yield curve-macroeconomy relation.