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The New Keynesian Model and Bond Yields

Published online by Cambridge University Press:  14 March 2025

Martin M. Andreasen
Martin M. Andreasen*
Affiliation:
Aarhus University and Danish Finance Institute
*
mandreasen@econ.au.dk
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Abstract

This article presents a New Keynesian model to capture the linkages between macro fundamentals and the nominal yield curve. The model explains bond yields with a low level of news in expected inflation and plausible term premia. This implies that the slope of the yield curve predicts future bond yields and that risk-adjusted historical bond yields satisfy the expectations hypothesis. The model also explains the spanning puzzle, matches key moments for real bond yields, captures the evolution of the price-dividend ratio, and implies that the slope of the yield curve and the price-dividend ratio forecast excess equity returns.

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Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 40
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

I thank Robert Goldstein (the referee), Kasper Jørgensen, Anders Bredahl Kock, Dennis Kristensen, Giovanni Pellegrino, Morten Ravn, and Daniel Wilhelm for useful comments and discussions. I also appreciate comments from participants at the Cemmap seminar at the University College London.

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