Looking Behind the U. K.Term Structure: Were there Peso Problems in Inflation?
AbstractThis paper develops and estimates a general equilibrium model for the term structures of nominal and real interest rates that incorporates regime-switching into the dynamics ofthe state variables. The model generates time-varying risk premia via changes in the covariance structure of the state variables and Peso problems through regime- switching. When the model is estimated using real and nominal yields from the U. K., I find that Peso problems emanating from instability in inflation have a significant impact on the nominal term structure. Peso problems affect (i) the sample predictability of excess returns, (ii) nominal term premia,and (iii) the inflation risk premia linking real and nominal yields with expected inflation.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 9809001.
Date of creation: 01 Sep 1998
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Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-1998-10-02 (All new papers)
- NEP-ETS-1998-10-02 (Econometric Time Series)
- NEP-FMK-1998-10-08 (Financial Markets)
- NEP-IFN-1998-10-02 (International Finance)
- NEP-PKE-1998-10-05 (Post Keynesian Economics)
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