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Extracting inflation expectations and inflation risk premia from the term structure: A joint model of the UK nominal and real yield curves

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  • Joyce, Michael A.S.
  • Lildholdt, Peter
  • Sorensen, Steffen

Abstract

This paper analyses the UK interest rate term structure over the period since October 1992, when the United Kingdom adopted an explicit inflation target, using an affine term structure model estimated using both government bond yields and survey data. The model imposes no-arbitrage restrictions across nominal and real yields, which enables interest rates to be decomposed into expected real policy rates, expected inflation, real term premia and inflation risk premia. The model is used to shed light on major developments over the period, including the impact of Bank of England independence and the low real bond yield 'conundrum'.

Suggested Citation

  • Joyce, Michael A.S. & Lildholdt, Peter & Sorensen, Steffen, 2010. "Extracting inflation expectations and inflation risk premia from the term structure: A joint model of the UK nominal and real yield curves," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 281-294, February.
    • Handle: RePEc:eee:jbfina:v:34:y:2010:i:2:p:281-294
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    More about this item

    Keywords

    Inflation expectations Inflation risk premia Affine term structure model;

    JEL classification:

    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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