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Decomposing real and nominal yield curves

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  • Abrahams, Michael
  • Adrian, Tobias
  • Crump, Richard K.
  • Moench, Emanuel
  • Yu, Rui

Abstract

Inflation-indexed and nominal yield curves capture investors׳ expectations of real short rates and inflation as well as their required compensation for bearing liquidity, inflation, and real interest rate risk. We estimate an affine term structure model that allows us to decompose real and nominal bond yields into these components and use the model to study the transmission of monetary policy. The model decompositions imply that the Federal Reserve׳s announcements of LSAPs lowered yields primarily by reducing real term premia. Changes in real term premia also account for the strong response of long-term real forward rates to federal funds rate surprises.

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  • Abrahams, Michael & Adrian, Tobias & Crump, Richard K. & Moench, Emanuel & Yu, Rui, 2016. "Decomposing real and nominal yield curves," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 182-200.
    • Handle: RePEc:eee:moneco:v:84:y:2016:i:c:p:182-200
    DOI: 10.1016/j.jmoneco.2016.10.006
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    More about this item

    Keywords

    TIPS breakevens; Expected inflation; Inflation risk premium; Affine term-structure model; Liquidity risk;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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