Essays on the yield curve, its predictive power and monetary policy

A huge literature provides two important empirical results on the yield curve. First, the expectations hypothesis fails. Second, the term spread has predictive power for the interest rate, output growth and the inflation rate. The literature has tried to explain the empirical facts and seems to reach a consensus that monetary policy plays some important role. Chapter 1 surveys the empirical results and the explanations, and suggests two directions for further work, which will be done in Chapters 2 and 3.;Chapter 2 integrates the predictability results and specifies the source of the predictive power of the term spread by using an affine term structure model with observable macroeconomic factors. The results suggest that bondholders are willing to pay a higher premium for a consumption hedge during a higher inflation regime. This causes term spreads to react to inflation shock, which proves useful for prediction. We also find that term spreads using the short end of the yield curve have less predictive power than many other spreads. We attribute this to monetary policy inertia.;Chapter 3 theoretically investigates the interest rate term structure in a new Keynesian framework for considering how the monetary policy rule affects the yield curve. The findings are as follows. First, a small slope of the Phillips curve and a persistent IS shock are consistent with term structure data. Second, term premia represent compensation for risk of time-variation in the IS shock rather than for cost-push and monetary policy shocks. Third, the term structure of inflation premium is almost flat on average. Finally, a less aggressive response to output gap in the monetary policy rule leads to smaller term premia. This implies, since an increase in the inflation rate causes the monetary policy authority to care more about the inflation rate than the output gap, a higher inflation rate results in a lower term premium.