Uncertainty and the price of risk in a nominal convergence process

Ricardo Gimeno and Jose Manuel Marqués Sevillano ()

No 802, Working Papers from Banco de España

Abstract: In this paper we decompose nominal interest rates into real risk-free rates, inflation expectations and risk premia using an affine model that takes as factors the observed inflation rate and the parameters generated in the zero yield curve estimation. We apply this model to the Spanish economy during the 90s, which is an especially challenging exercise given the nominal convergence towards the European Monetary Union (EMU) then under way. The methodology seems to be suitable for other countries currently involved in convergence towards EMU. The evidence indicates that inflation expectations and risk premia account for most of the observed variation in nominal rates, while real risk-free interest rates show a reduction during this period lower than that suggested by other approaches.

Keywords: Real interest rates; Risk Premium; Inflation expectations; Affine Model (search for similar items in EconPapers)
JEL-codes: C53 E43 E44 G12 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2008-01
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0802

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