Estimating inflation risk premia from nominal and real yield curves using a shadow-rate model

Kei Imakubo and Jouchi Nakajima
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Kei Imakubo: Bank of Japan

No 15-E-1, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper proposes and estimates an extended shadow-rate term structure model, and uses it to extract inflation risk premia from nominal and real term structures. Our model incorporates the shadow rate and thereby explicitly takes account of the zero lower bound constraint of nominal interest rates. The estimation results for Japan and the United States confirm that our model successfully avoids the estimation bias inherent in the standard affine-type term structure model that ignores the zero lower bound. As we theoretically and empirically demonstrate, the inflation risk premium is time-varying and takes both positive and negative values reflecting market concerns with regard to asymmetric uncertainty in future inflation.

Keywords: Arbitrage-free term structure; Inflation risk premium; Shadow rate; Term premium; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 G12 (search for similar items in EconPapers)
Date: 2015-04-16
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (19)

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