Looking Behind the U. K.Term Structure: Were there Peso Problems in Inflation?

Martin Evans ()

Finance from EconWPA

Abstract: This paper develops and estimates a general equilibrium model for the term structures of nominal and real interest rates that incorporates regime-switching into the dynamics ofthe state variables. The model generates time-varying risk premia via changes in the covariance structure of the state variables and Peso problems through regime- switching. When the model is estimated using real and nominal yields from the U. K., I find that Peso problems emanating from instability in inflation have a significant impact on the nominal term structure. Peso problems affect (i) the sample predictability of excess returns, (ii) nominal term premia,and (iii) the inflation risk premia linking real and nominal yields with expected inflation.

JEL-codes: G12 E31 E43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets, nep-fmk, nep-ifn and nep-pke
Date: 1998-09-01
Note: Type of Document - .pdf; prepared on IBM PC; to print on HP;
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:9809001

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