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Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset

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  • Jonathan H. Wright
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    Abstract

    This paper provides cross-country empirical evidence on term premia. I construct a panel of zero-coupon nominal government bond yields spanning ten industrialized countries and nearly two decades. I hence compute forward rates and use two different methods to decompose these forward rates into expected future short-term interest rates and term premiums. The first method uses an affine term structure model with macroeconomic variables as unspanned risk factors; the second method uses surveys. I find that term premiums declined internationally over the sample period, especially in countries that apparently reduced inflation uncertainty by making substantial changes in their monetary policy frameworks. (JEL E13, E43, E52, G12, H63)

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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 101 (2011)
    Issue (Month): 4 (June)
    Pages: 1514-34

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    Handle: RePEc:aea:aecrev:v:101:y:2011:i:4:p:1514-34

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    1. Glenn D. Rudebusch & Eric T. Swanson, 2008. "Examining the bond premium puzzle with a DSGE model," Working Paper Series 2007-25, Federal Reserve Bank of San Francisco.
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    6. James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
    7. Zarnowitz, Victor & Lambros, Louis A, 1987. "Consensus and Uncertainty in Economic Prediction," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(3), pages 591-621, June.
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    9. Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-15, Board of Governors of the Federal Reserve System (U.S.).
    10. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 451-72, June.
    11. Rich, R W & Raymond, J E & Butler, J S, 1992. "The Relationship between Forecast Dispersion and Forecast Uncertainty: Evidence from a Survey Data-ARCH Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(2), pages 131-48, April-Jun.
    12. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
    13. Victor Zarnowitz & Louis A. Lambros, 1983. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc.
    14. Pierre Collin-Dufresne & Robert S. Goldstein, 2002. "Do Bonds Span the Fixed Income Markets? Theory and Evidence for Unspanned Stochastic Volatility," Journal of Finance, American Finance Association, American Finance Association, vol. 57(4), pages 1685-1730, 08.
    15. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
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    Cited by:
    1. Ravi Bansal & Ivan Shaliastovich, 2012. "A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets," NBER Working Papers 18357, National Bureau of Economic Research, Inc.
    2. Adrian, Tobias & Crump, Richard K. & Moench, Emanuel, 2013. "Pricing the term structure with linear regressions," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(1), pages 110-138.
    3. Koeda, Junko, 2013. "Endogenous monetary policy shifts and the term structure: Evidence from Japanese government bond yields," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 170-188.
    4. Dahlquist, Magnus & Hasseltoft, Henrik, 2013. "International Bond Risk Premia," Journal of International Economics, Elsevier, vol. 90(1), pages 17-32.
    5. Ulrich, Maxim, 2013. "Inflation ambiguity and the term structure of U.S. Government bonds," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(2), pages 295-309.
    6. Galvao, Ana Beatriz & Costa, Sonia, 2013. "Does the euro area forward rate provide accurate forecasts of the short rate?," International Journal of Forecasting, Elsevier, Elsevier, vol. 29(1), pages 131-141.
    7. Josh Stillwagon, 2014. "Subjective Term Premia, Consumer Sentiment, and the Zero Lower Bound," Working Papers, Trinity College, Department of Economics 1401, Trinity College, Department of Economics.
    8. Yin, Weiwei & Li, Junye, 2014. "Macroeconomic fundamentals and the exchange rate dynamics: A no-arbitrage macro-finance approach," Journal of International Money and Finance, Elsevier, Elsevier, vol. 41(C), pages 46-64.
    9. Gilchrist, Simon & Lopez-Salido, J. David & Zakrajsek, Egon, 2014. "Monetary Policy and Real Borrowing Costs at the Zero Lower Bound," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2014-39, Board of Governors of the Federal Reserve System (U.S.).
    10. Bai, Jushan & Wang, Peng, 2012. "Identification and estimation of dynamic factor models," MPRA Paper 38434, University Library of Munich, Germany.
    11. Ralph S.J. Koijen & Tobias J. Moskowitz & Lasse Heje Pedersen & Evert B. Vrugt, 2013. "Carry," NBER Working Papers 19325, National Bureau of Economic Research, Inc.

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