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Affine Endeavour: Estimating a Joint Model of the Nominal and Real Term Structures of Interest Rates in Australia

Author

Listed:
  • Jonathan Hambur

    (Reserve Bank of Australia)

  • Richard Finlay

    (Reserve Bank of Australia)

Abstract

We outline a 'workhouse' affine term structure model of nominal and real interest rates in Australia. The model allows us to decompose observed yields paid on nominal and inflation-indexed government bonds into expectations for real and nominal interest rates, expectations for inflation, as well as real term premia and inflation risk premia. The results should not be interpreted too precisely given data limitations and the complexity of the model. Nevertheless, they suggest that medium- to long-term expectations for real interest rates, a market-based measure of the neutral real interest rate, have declined in recent years. At the same time, long-term inflation expectations have remained firmly within the Reserve Bank's 2 to 3 per cent target band and have been more stable than suggested by measures of break-even inflation. Finally, the results suggest that real term premia have declined since the global financial crisis, which may reflect overseas factors given it has coincided with declines in US term premia.

Suggested Citation

  • Jonathan Hambur & Richard Finlay, 2018. "Affine Endeavour: Estimating a Joint Model of the Nominal and Real Term Structures of Interest Rates in Australia," RBA Research Discussion Papers rdp2018-02, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2018-02
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    References listed on IDEAS

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    Cited by:

    1. Jonathan Hambur & Gianni La Cava, 2018. "Do Interest Rates Affect Business Investment? Evidence from Australian Company-level Data," RBA Research Discussion Papers rdp2018-05, Reserve Bank of Australia.
    2. Burçin Kısacıkoğlu, 2020. "Real Term Structure and New Keynesian Models," International Journal of Central Banking, International Journal of Central Banking, vol. 16(3), pages 95-139, June.
    3. Richard Finlay & Dmitry Titkov & Michelle Xiang, 2022. "The Yield and Market Function Effects of the Reserve Bank of Australia's Bond Purchases," RBA Research Discussion Papers rdp2022-02, Reserve Bank of Australia.
    4. Jonathan Hambur & Qazi Haque, 2023. "Can We Use High-frequency Yield Data to Better Understand the Effects of Monetary Policy and Its Communication? Yes and No!," RBA Research Discussion Papers rdp2023-04, Reserve Bank of Australia.

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    More about this item

    Keywords

    affine term structure model; joint real and nominal; survey data;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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