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Decomposing Euro Area Sovereign Debt Yields into Inflation Expectations and Expected Real Interest Rates

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  • Rajmund MIRDALA

    (Faculty of Economics Technical University of Kosice Slovakia)

Abstract

Quantitative easing conducted by European central bank to fight persisting risks of deflation is drawing an attention of increasing number of empirical studies Moreover effectiveness of monetary policy at near zero inflation rates reveals lot of issues on whether interest rates really have a lower bound around zero percent As a result traditional views on the role of inflation expectations and expected real interest rates in the long term interest rates determination face the challenge of fundamental revision In the paper we analyze relative contributions of inflation expectations and expected real interest rates to long term interest rates on government bonds leading path as well as their responses to both types of shocks in the Euro Area member countries using SVAR methodology We also decompose long term interest rates into transitory and permanent components Our research revealed considerable differences in the role of inflation expectations and expected real interest rates shocks in determining long term interest rates between core and periphery countries of the Euro Area The crisis period even intensified this trend

Suggested Citation

  • Rajmund MIRDALA, 2015. "Decomposing Euro Area Sovereign Debt Yields into Inflation Expectations and Expected Real Interest Rates," Journal of Advanced Research in Law and Economics, ASERS Publishing, vol. 6(4), pages 714-737.
    • Handle: RePEc:srs:jarle0:v:6:y:2015:i:4:p:714-737
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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