Is there causality from economic activity to the yield curve?
A. Most of the literature in this field deals with the yield curve as a predictor of future activity, but in principle there could be influences in the opposite direction, from economic activity to the yield curve. In a dynamic theoretical model with rational expectations, such as Estrella (2005a), both directions play a role. The term spread contains expectations of future activity, and it is affected by current monetary policy, which is influenced in turn by current economic activity. Empirically, Estrella and Hardouvelis (1990) use U.S. data to examine the effect of monetary policy on the yield curve, and Estrella and Mishkin (1997) perform a similar analysis for a panel of European economies. Evans and Marshall (2001) find consistent evidence that monetary policy shocks affect the nominal yield curve. In the context of a vector autoregression, Diebold, Rudebusch and Aruoba (2004) find that the influence in the direction from activity to the term structure is even stronger than the
