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The Term Structure of Real Rates and Expected Inflation

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Author Info
Andrew Ang
Geert Bekaert
Min Wei

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12930.

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Date of creation: Feb 2007
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Handle: RePEc:nbr:nberwo:12930

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Find related papers by JEL classification:
C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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