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The Term Structure of Real Rates and Expected InflationAndrew AngColumbia Business School - Finance and Economics; National Bureau of Economic Research (NBER) Geert BekaertColumbia Business School - Finance and Economics; National Bureau of Economic Research (NBER) Min WeiBoard of Governors of the Federal Reserve - Division of Monetary Affairs February 2007 NBER Working Paper No. w12930 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.
Number of Pages in PDF File: 68 working papers seriesDate posted: February 24, 2007Suggested CitationContact Information
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