We show that the slope of the sovereign yield curve predicts future economic activity not only through its level but also through its changes (or differences) over time. Our results with US data show that the additional inclusion of the changes of the yield slope in the traditional regressions significantly increases the explanatory power of the yield curve. Through the yield slope decomposition, we find that positive changes in both the risk-neutral spread and the term premium increase the likelihood of recession in the next 3 or 12 months. Estimated linear equations that directly forecast economic activity confirm the predictive power of both components in the medium run. These predictive equations also identify the term premium as the relevant component of yield slope changes for medium-run (3-12 months) forecasts. Our out-of-sample exercises show that the empirical models including both the level and the differences of the slope perform better than the models including only the yield slope level.

The co-movement of US Treasury yields suggests a long-run equilibrium relationship. Traditional cointegrated systems need to assume that interest rates are unit roots and thus implying non-stationary and non-mean-reverting dynamics. We postulate and estimate a fractional cointegrated model (FCVAR) which allows for mean reverting though highly persistent patterns. Our results point to the existence of such mean-reverting fractional cointegration among Treasury yields. In terms of out-of-sample forecasting, the FCVAR soundly beats the I(0) VAR model across interest rate maturities and horizons and the I(1) cointegrated VAR across maturities and short-horizons. The implied US term premium -across different maturities- proves to be quite robust across subsamples and is less volatile than the classical I(0) stationary and I(1) unit root models. Our analysis highlights the role of real factors in shaping term premium dynamics and is extended to the UK and Germany yield curves. (c) 2023 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license ( http://creativecommons.org/licenses/by/4.0/ )

We introduce business-to-business (B2B) relationships into an otherwise standard model to revisit two aspects of price dynamics in a unified analysis. On one side, the pass-through of cost shocks to prices is empirically incomplete. On the other side, the literature contains conjectures that long-term relationships may reduce the allocative role of price changes. After a partial equilibrium analysis of these aspects, we consider the general equilibrium effects. The formation of B2B relationships implies that the trade of intermediate goods depends on search, bargaining, and the adjustment along the intensive margin as opposed to the extensive margin. We find that, when this adjustment is costly, retailers have a relatively high bargaining power, and mismatch shocks are possible, the model can account for the second moments of the US producer price index and other variables. In this case, although its allocative role is low, the intermediate goods price affects the allocation of goods through the search externalities and is sufficiently volatile. The analysis includes several sensitivity tests and comparisons.

This paper introduces unspanned global factors within a FAVAR framework in a flexible reduced-form affine term structure model. We apply our method to a panel of international yield curves and show that global factors account for more than 80 percent of term premiums in advanced economies. In particular, they tend to explain long-term dynamics in yield curves, as opposed to domestic factors which are instead more relevant for short-run movements. We uncover a key role for the third principal component of the global term structure in shaping risk-neutral rates and term premium dynamics, especially in the post-2007 period.

This paper investigates empirically the effect of labor market institutions (LMIs) on business cycle fluctuations. Most studies, using a cross-country panel approach, have found a weak effect of LMIs on unemployment and, especially, inflation dynamics. In this paper, we estimate an interacted panel VAR for OECD countries, where we allow the dynamics of inflation, unemployment, and the interest rate to vary with the characteristics of the labor market. We find that LMIs have a large and significant effect on both unemployment and inflation dynamics. Stricter employment protection legislation and higher union density mute the reaction of unemployment but increase the response of inflation to external shocks. The opposite effects are found for the generosity of the unemployment benefit system and the extent of the tax wedge. Countries with decentralized wage bargaining manage to absorb shocks through lower variations in unemployment. Our results imply that countries with very rigid or very flexible labor markets can have similar inflation and unemployment dynamics.

Stationary I(0) models employed in yield curve analysis typically imply an unrealistically low degree of volatility in long-run, short-rate expectations due to fast mean reversion. In this article, we propose a novel multivariate affine term structure model with a two-fold source of persistence in the yield curve: long memory and short memory. Our model, based on an I( d ) specification, nests the I(0) and I(1) models as special cases and the I(0) model is decisively rejected by the data. Our model estimates imply both mean reversion in yields and quite volatile long-distance, short-rate expectations, due to the higher persistence imparted by the long-memory component. Our implied term premium estimates differ from those of the I(0) model during some relevant periods by more than 3 percentage points and exhibit a realistic counter-cyclical pattern.

The growth rates of wages, unemployment and output of a number of OECD countries have a strongly skewed distribution. In this paper we analyze to what extent downward wage rigidities can explain these empirical business cycle asymmetries. To this aim, we introduce asymmetric wage adjustment costs in a New-Keynesian DSGE model with search and matching frictions in the labor market. Increasing wages is less costly than cutting them. It follows that wages increase relatively fast and thus limit vacancy posting and employment creation, but they decline more slowly, leading to a strong reduction in vacancies and employment. The presence of downward wage rigidities strongly improves the fit of the model to the observed skewness of labor market variables and the relative length of expansions and contractions in the output and the employment cycles. The asymmetry also explains the differing transmission of positive and negative monetary policy shocks from wages to inflation

How does the asymmetry of labor market institutions affect the adjustment of a currency union to shocks? To answer this question, this paper sets up a dynamic currency union model with monopolistic competition and sticky prices, hiring frictions and real wage rigidities. In our analysis, we focus on the differentials in inflation and unemployment between countries, as they directly reflect how the currency union responds to shocks. We highlight the following three results: First, we show that it is important to distinguish between different labor market rigidities as they have opposite effects on inflation and unemployment differentials. Second, we find that asymmetries in labor market structures tend to increase the volatility of both inflation and unemployment differentials. Finally, we show that it is important to take into account the interaction between different types of labor market rigidities. Overall, our results suggest that asymmetries in labor market structures worsen the adjustment of a currency union to shocks.

The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state as well as involuntary fluctuations in unemployment. The existence of hiring frictions introduces externalities that, in turn, entail the breakdown of the "divine coincidence" without assuming real wage rigidity. We are able to show that our model with labour market imperfections outperforms the standard New Keynesian model as for the persistence of responses to monetary shocks. We also attempt an analysis of the volatility of two economies, differing in their "degrees of imperfection". It turns out that "rigid" economies exhibit less unemployment volatility and more inflation volatility than "flexible" economies