The researchers analyzed how inflation, output, and monetary policy affect interest rates using a New Keynesian policy model. They found that inflation and the output gap explain most of the changes in bond yields, with monetary policy playing a smaller role. Bond yields react slowly to economic shocks, peaking after about 4 quarters due to significant monetary policy inertia. Inflation shocks raise bond yields more than output shocks, in line with a typical monetary policy rule. The term premium estimate is strongly influenced by economic cycles and can explain puzzling aspects of the term structure of interest rates.