Working Paper: NBER ID: w12930
Authors: Andrew Ang; Geert Bekaert; Min Wei
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 in the U.S. 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.
Keywords: No keywords provided
JEL Codes: C50; E31; E32; E43; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real rates (E43) | nominal yields (G12) |
| expected inflation (E31) | nominal yields (G12) |
| inflation risk premium (E31) | nominal yields (G12) |
| real short rate (E43) | expected inflation (E31) |
| real short rate (E43) | unexpected inflation (E31) |
| inflation compensation (E31) | nominal yields (G12) |
| real rates (E43) | inflation risk premiums (E31) |