The term structure and inflation uncertainty

Tomas Breach, D’Amico, Stefania and Athanasios Orphanides

Journal of Financial Economics, 2020, vol. 138, issue 2, 388-414

Abstract: To assess the importance of inflation risk for nominal Treasury yields, a novel quadratic term structure model with time-varying inflation risk is estimated using survey-based inflation uncertainty. The resulting yield decomposition captures very diverse macroeconomic dynamics of inflation and real risk premiums (large and positive during the 1980s but small and negative post-2008) and generates sensible high-frequency estimates of expected inflation and real short rates over a long sample. The explicit link between the model-implied factors and macro fundamentals reveals that short- but not long-run fluctuations are unspanned by yields, consistent with an interest rate policy unresponsive to transient inflation shocks.

Keywords: Quadratic-Gaussian term structure models; Inflation risk premium; Survey forecasts; Hidden factors (search for similar items in EconPapers)
JEL-codes: C58 E43 E44 G12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: The Term Structure and Inflation Uncertainty (2016)
Working Paper: The Term Structure and Inflation Uncertainty (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:138:y:2020:i:2:p:388-414

DOI: 10.1016/j.jfineco.2020.04.013

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