Working Paper: CEPR ID: DP16365
Authors: Geert Bekaert; Andrey Ermolov
Abstract: We decompose long-term nominal bond yields into real and inflation components in aninternational context using inflation-linked and nominal bonds. In contrast to extantresults, real rate variation dominates the variation in inflation-linked and nominal yields.Cross-country nominal and inflation-linked yield correlations have declined since the GreatRecession. Real rates are the main source of the correlation between nominal yields. Ourresults are robust to various alternative measurements of inflation expectations and theliquidity premium. They continue to hold when a no-arbitrage term structure model withreal, nominal, and inflation factors is used to effect the yield decomposition.
Keywords: Treasuries; Sovereign Bonds; Cross-country Comovement; Real Yield; Expected Inflation; Inflation Risk Premium; Liquidity Premium
JEL Codes: E31; E43; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real yields (E43) | nominal yields (G12) |
| expected inflation (E31) | nominal yields (G12) |
| real yields (E43) | expected inflation (E31) |
| liquidity premiums (G19) | nominal yields (G12) |
| inflation risk premiums (E31) | nominal yields (G12) |
| real yields (E43) | inflation risk premiums (E31) |