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The expected real yield and inflation components of the nominal yield curve

Ronald H. Lange

The North American Journal of Economics and Finance, 2017, vol. 39, issue C, 1-18

Abstract: The term structure of real yields and expected inflation are two unobserved components of the nominal yield curve. The primary objectives of this study are to decompose nominal yields into their expected real yield and inflation components and to examine their behaviour using state-space and regime-switching frameworks. The dynamic yield-curve models capture three well-known latent factors – level, slope, and curvature – that accurately aggregate the information for the nominal yields and the expected real and inflation components for all maturities. The nominal yield curve is found to increase slightly with a slope of about 120 basis points, while the real yield curve slopes upward by about 20 basis points, and the expected inflation curve is virtually flat at slightly above 2 per cent. The regime-switching estimations reveal that the nominal yield, real yield and expected inflation curves have shifted down significantly since 1999.

Keywords: Yield curve; Real interest rates; Expected inflation, factor model; State-space model; Regime-switching estimation (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
Date: 2017
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