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The Term Structure of Real Rates and Expected Inflation
Author(s) -
ANG ANDREW,
BEKAERT GEERT,
WEI MIN
Publication year - 2008
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2008.01332.x
Subject(s) - yield curve , inflation (cosmology) , economics , real interest rate , term (time) , nominal interest rate , risk premium , econometrics , interest rate , affine term structure model , fisher hypothesis , yield (engineering) , monetary policy , maturity (psychological) , monetary economics , physics , quantum mechanics , theoretical physics , thermodynamics , psychology , developmental psychology
Changes in nominal interest rates must be due to either movements in real interest rates, expected inflation, or the inflation risk premium. We develop a term structure model with regime switches, time‐varying prices of risk, and inflation to identify these components of the nominal yield curve. We find that the unconditional real rate curve in the United States is fairly flat around 1.3%. In one real rate regime, the real term structure is steeply downward sloping. An inflation risk premium that increases with maturity fully accounts for the generally upward sloping nominal term structure.