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UK term structure decompositions at the zero lower bound
Author(s) -
Carriero Andrea,
Mouabbi Sarah,
Vangelista Elisabetta
Publication year - 2018
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2635
Subject(s) - zero lower bound , yield curve , economics , stylized fact , inflation (cosmology) , affine term structure model , monetary policy , term (time) , econometrics , nominal interest rate , short rate , zero (linguistics) , risk premium , credibility , interest rate , real interest rate , monetary economics , keynesian economics , linguistics , philosophy , physics , quantum mechanics , theoretical physics , political science , law
Summary 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.