Misaligned expectations and bond term premium measures

Jesús Vázquez

The North American Journal of Economics and Finance, 2025, vol. 79, issue C

Abstract: This paper shows that inflation expectations and those embedded in short-term interest rate expectations as reported in the Survey of Professional Forecasters show evidence of misaligned expectations. This misalignment seems to have been substantial in recent times, featuring a low correlation between inflation and the policy rate. This empirical evidence motivates an alternative explanation, based on uncertainty rather than risk, of the bond term premium measures found in the literature. This paper estimates an expectational term premium driven by misaligned short-term interest rate expectations from a behavioral DSGE model that introduces model uncertainty by assuming adaptive learning with discretionary beliefs. The estimated 10-year expectational term premium shares important features with the corresponding term premium measures obtained using no-arbitrage affine term structure models. Thus, the expectational term premium is sizable, highly persistent, mildly countercyclical, and highly correlated with those term premium measures in the most recent period studied. In short, a potential misalignment of short-term interest expectations with inflation expectations provides an important channel for explaining the bond premium lately.

Keywords: Expectation misalignment; Expectational term premium; Uncertainty; Adaptive learning with discretionary beliefs (search for similar items in EconPapers)
JEL-codes: D84 E30 E43 E44 G12 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:79:y:2025:i:c:s1062940825000828

DOI: 10.1016/j.najef.2025.102442

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