Inflation ambiguity and the term structure of U.S. Government bonds

Maxim Ulrich

Journal of Monetary Economics, 2013, vol. 60, issue 2, 295-309

Abstract: Variations in trend inflation are the main driver for variations in the nominal yield curve. According to empirical data, investors observe a set of empirical models that could all have generated the time-series for trend inflation. This set has been large and volatile during the 1970s and early 1980s and small during the 1990s. I show that log utility together with Knightian uncertainty about trend inflation can explain the term premium in U.S. Treasury bonds. The equilibrium has two inflation premiums, an inflation risk premium and a Knightian inflation ambiguity premium.

JEL-codes: D53 D81 E43 E44 E52 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (37)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:60:y:2013:i:2:p:295-309

DOI: 10.1016/j.jmoneco.2012.10.015

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