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Term premiums and inflation uncertainty: empirical evidence from an international panel dataset

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  • Jonathan H. Wright

Abstract

This paper provides cross-country empirical evidence on term premia, inflation uncertainty, and their relationship. It has three components. First, I construct a panel of zero-coupon nominal government bond yields spanning ten countries and eighteen years. From these, I construct forward rates and decompose these into expected future short-term interest rates and term premiums, using both statistical methods (an affine term structure model) and using surveys. Second, I construct alternative measures of time-varying inflation uncertainty for these countries, using actual inflation data and survey expectations. I discuss some possible determinants of inflation uncertainty. Finally, I use panel data methods to investigate the relationship between term premium estimates and inflation uncertainty measures, and find a strong positive relationship. The economic determinants of term premia remain mysterious; but this evidence points to uncertainty about intermediate- to long-run inflation rates being a substantial part of the explanation for why yield curves slope up.

Suggested Citation

  • Jonathan H. Wright, 2008. "Term premiums and inflation uncertainty: empirical evidence from an international panel dataset," Finance and Economics Discussion Series 2008-25, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2008-25
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    References listed on IDEAS

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    1. repec:taf:quantf:v:17:y:2017:i:12:p:1783-1793 is not listed on IDEAS
    2. Jonas Dovern & Ulrich Fritsche & Jiri Slacalek, 2012. "Disagreement Among Forecasters in G7 Countries," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1081-1096, November.
    3. Michael T. Kiley, 2008. "Inflation expectations, uncertainty, the Phillips curve, and monetary policy - comments," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 53.

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    Keywords

    Inflation (Finance) ; Bonds - Prices;

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