68 Pages Posted: 24 Feb 2007
Date Written: February 2007
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.
Suggested Citation: Suggested Citation
Ang, Andrew and Bekaert, Geert and Wei, Min, The Term Structure of Real Rates and Expected Inflation (February 2007). NBER Working Paper No. w12930. Available at SSRN: https://ssrn.com/abstract=965122