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The term structure of inflation compensation in the nominal yield curve

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  • Mehmet Pasaogullari
  • Simeon Tsonevy

Abstract

We propose a DSGE model with regime switching in the central bank’s inflation target to explain inflation compensation in the UK. Taking advantage of the well-documented change in UK monetary policy to adopt inflation targeting, we estimate our model using nominal and inflation-linked Treasury bond data from the UK from 1985 to 2007. We find that this model can account for the term structure of inflation compensation in the nominal yield curve by generating regime-dependent conditional expectations of future inflation.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1133.

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Date of creation: 2011
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Handle: RePEc:fip:fedcwp:1133

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Keywords: Inflation targeting ; Monetary policy - Great Britain;

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  21. Eric Swanson & Glenn Rudebusch, 2008. "Long-Run Inflation Risk and the Postwar Term Premium," 2008 Meeting Papers 988, Society for Economic Dynamics.
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