The Term Structure and Inflation Uncertainty
Stefania D'Amico and
Athanasios Orphanides ()
No 11730, CEPR Discussion Papers from C.E.P.R. Discussion Papers
This paper develops and estimates a Quadratic-Gaussian model of the US term structure that can accommodate the rich dynamics of inflation risk premia over the 1983-2013 period by allowing for time-varying market prices of inflation risk and incorporating survey information on inflation uncertainty in the estimation. The model captures changes in premia over very diverse periods, from the inflation scare episodes of the 1980s, when perceived inflation uncertainty was high, to the more recent episodes of negative premia, when perceived inflation uncertainty has been considerably smaller. A decomposition of the nominal ten-year yield suggests a decline in the estimated inflation risk premium of 1.7 percentage points from the early 1980s to mid-1990s. Subsequently, its predicted value has fluctuated around zero and turned negative at times, reaching its lowest values (about -0.6 percentage points) before the latest financial crisis, in 2005-2007, and during the subsequent weak recovery, in 2010-2012. The model's ability to generate sensible estimates of the IRP has important implications for the other components of the nominal yield: expected real rates, expected inflation, and real risk premia.
Keywords: Hidden Factors; Inflation Risk Premium; Quadratic-Gaussian Term Structure Models; Survey Forecasts (search for similar items in EconPapers)
JEL-codes: C58 E43 E44 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at firstname.lastname@example.org
Working Paper: The Term Structure and Inflation Uncertainty (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:11730
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=11730
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().