UK term structure decompositions at the zero lower bound

Andrea Carriero, Sarah Mouabbi and Elisabetta Vangelista

Journal of Applied Econometrics, 2018, vol. 33, issue 5, 643-661

Abstract: This paper employs a zero lower bound (ZLB) consistent shadow‐rate model to decompose UK nominal yields into expectation and term premium components. Compared to a standard affine term structure model, it performs relatively better in a ZLB setting by capturing the stylized facts of the yield curve. The ZLB model is then exploited to estimate inflation expectations and risk premiums. This entails jointly pricing and decomposing nominal and real UK yields. We find evidence that medium‐ and long‐term inflation expectations are contained within narrower bounds since the early 1990s, suggesting monetary policy credibility improved after the introduction of inflation targeting.

Date: 2018
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https://doi.org/10.1002/jae.2635

Related works:
Working Paper: UK term structure decompositions at the zero lower bound (2016)
Working Paper: UK Term Structure Decompositions at the Zero Lower Bound (2015)
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