Abstract

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 is fairly flat at 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

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Citation

Bekaert, Geert, and Andrew Ang. "The Term Structure of Real Rates and Expected Inflation." Working paper, Columbia University and NBER, 2004.

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