A regime-switching Nelson-Siegel term structure model of the macroeconomy

This paper presents a regime-switching Nelson-Siegel term structure model with macro factors and introduces a Markov chain Monte Carlo procedure to estimate the model. We find that regime shifts are important for understanding the interaction between the yield curve and economic activity. We also find that two regimes are closely related to the business cycle and monetary policy. Finally, we find that the proposed regime-switching model with macro factors is competitive in the out-of-sample forecasting of bond yields.