This paper estimates a model that summarizes the yield curve using latent factors (level, slope, and curvature) and includes observable macroeconomic variables (real activity, inflation, and monetary policy). The goal is to characterize the dynamic interactions between the macroeconomy and the yield curve. The authors find strong evidence of macroeconomic effects on future yield curve movements and weaker evidence of yield curve effects on future macroeconomic developments. They also relate their results to the expectations hypothesis, finding that it holds reasonably well during certain periods but not across the entire sample. The analysis is unique in that no-arbitrage restrictions are not imposed, which may be more realistic given potential illiquidity in thinly-traded regions of the yield curve.This paper estimates a model that summarizes the yield curve using latent factors (level, slope, and curvature) and includes observable macroeconomic variables (real activity, inflation, and monetary policy). The goal is to characterize the dynamic interactions between the macroeconomy and the yield curve. The authors find strong evidence of macroeconomic effects on future yield curve movements and weaker evidence of yield curve effects on future macroeconomic developments. They also relate their results to the expectations hypothesis, finding that it holds reasonably well during certain periods but not across the entire sample. The analysis is unique in that no-arbitrage restrictions are not imposed, which may be more realistic given potential illiquidity in thinly-traded regions of the yield curve.