Term Premia and Short-Rate Expectations in the Euro Area

Identifying the components of yields is a challenging task for monetary authorities. We use a stochastic volatility macro term structure model to estimate time-varying term premia and short-rate expectations for ten countries in the euro area. The model relies on country-specific factors and eurozone global factors and accounts for the effect of yield-related, volatility and macro variables on yield components. The empirical analysis includes yields with maturities up to 30 years and provides new evidence on the behavior of long-maturity term premia and expected short rates. We find significant cross-country interconnections for the yield components, with the size of the links that varies substantially over time and across countries