US interest rates: Are relations stable?

In this paper, we assess whether key relations between US interest rates have been stable over time. This is done by estimating trivariate hybrid time-varying parameter Bayesian VAR models with stochastic volatility for the three-month Treasury bill rate, the slope of the Treasury yield curve and the corporate bond-yield spread. As a methodological contribution, we also allow for disturbances with heavy tails. We analyse monthly data from April 1953 to February 2023 both within- and out-of-sample. Our results indicate that the relations have not been stable; more specifically, there is evidence that the equation of the corporate bond-yield spread is subject to time variation in its parameters. We also find that an increase in the corporate bond-yield spread decreases the risk free rate. Finally, we note that while allowing for heavy tails receives a fair amount of support within sample, it appears to be of more limited importance from a forecasting perspective.