Conclusion and Outlook

Abstract

Combining finance models with monetary macroeconomics helps to understand the link that exists between them. Essentially, the macro-finance approach of modeling the yield curve and the macroeconomy allows for the analysis of how macroeconomic variables spread across bond yields of different maturities. For monetary policy, these interactions are of primary interest. Firstly, the relationship between short and long-term interest rates is relevant for the transmission mechanism. The dynamic of New-Keynesian business cycle models is driven by changing expectations about future economic variables. Forward-looking agents form expectations that profoundly influence the current economic outcome. The term structure of interest rates takes on a central role as it imbeds the expectations-driven long-term interest rates that determines aggregate credit demand. Secondly, the term structure reflects private expectations of future macroeconomics developments and provides monetary policy with valuable information about the perceived future monetary policy stance as well as inflation and output expectations.