Equilibrium yield curves with imperfect information

Abstract

I study the dynamics of default-free bond yields and term premia using a novel equilibrium term structure model with a New-Keynesian core and imperfect information about productivity. Imperfect information can justify a shock to signals about productivity that does not lead to actual changes in productivity, which can be interpreted as a demand shock. When incorporated in a DSGE term structure model with a standard productivity shock, this demand shock generates term premia that are on average higher, with sizable countercyclical variation that arises endogenously. The model helps reconcile the empirical evidence that term premia have been on average positive and countercyclical, with numerous studies pointing to demand shocks as a key driver of business cycles over the last few decades.