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Inflation ambiguity and the term structure of U.S. Government bonds

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  • Ulrich, Maxim
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    Abstract

    Variations in trend inflation are the main driver for variations in the nominal yield curve. According to empirical data, investors observe a set of empirical models that could all have generated the time-series for trend inflation. This set has been large and volatile during the 1970s and early 1980s and small during the 1990s. I show that log utility together with Knightian uncertainty about trend inflation can explain the term premium in U.S. Treasury bonds. The equilibrium has two inflation premiums, an inflation risk premium and a Knightian inflation ambiguity premium.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Monetary Economics.

    Volume (Year): 60 (2013)
    Issue (Month): 2 ()
    Pages: 295-309

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    Handle: RePEc:eee:moneco:v:60:y:2013:i:2:p:295-309

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    Web page: http://www.elsevier.com/locate/inca/505566

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