How Important Are Inflation Expectations for the Nominal Yield Curve?

Pricing the term structure with linear regressions

Roberto Gomez-Cram and Amir Yaron

The Review of Financial Studies, 2021, vol. 34, issue 2, 985-1045

Abstract: Macrofinance term structure models rely too heavily on the volatility of expected inflation news as a source for variations in nominal bond yield shocks. We develop and estimate a model featuring inflation nonneutrality and preference shocks. The stochastic volatility of inflation and consumption govern bond risk premiums movements, whereas preference shocks generate fluctuations in real rates. The model accounts for key bond market features without resorting to an overly dominating expected inflation channel. The estimation shows that preference shocks are strongly negatively correlated with market distress factors and that real rate news is the dominant driver of nominal yield shocks.

JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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