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Inflation Expectations and Risk Premiums in an Arbitrage‐Free Model of Nominal and Real Bond Yields
Author(s) -
CHRISTENSEN JENS H. E.,
LOPEZ JOSE A.,
RUDEBUSCH GLENN D.
Publication year - 2010
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2010.00332.x
Subject(s) - treasury , economics , inflation (cosmology) , real interest rate , fisher hypothesis , bond , risk premium , arbitrage , monetary economics , international fisher effect , econometrics , maturity (psychological) , nominal interest rate , yield curve , monetary policy , interest rate , financial economics , finance , psychology , developmental psychology , physics , archaeology , theoretical physics , history
Differences between yields on comparable‐maturity U.S. Treasury nominal and real debt, the so‐called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums (IRP) from the BEI rates. We provide such decompositions using an affine arbitrage‐free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long‐term inflation expectations have been well anchored over the past few years, and IRP, although volatile, have been close to zero on average.