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The Term Structure of Real Rates and Expected Inflation

Listed author(s):
  • Andrew Ang
  • Geert Bekaert
  • Min Wei

Changes in nominal interest rates must be due to either movements in real interest rates, expected inflation, or the inflation risk premium. We develop a term structure model with regime switches, time-varying prices of risk, and inflation to identify these components of the nominal yield curve. We find that the unconditional real rate curve in the U.S. is fairly flat around 1.3%. In one real rate regime, the real term structure is steeply downward sloping. An inflation risk premium that increases with maturity fully accounts for the generally upward sloping nominal term structure.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12930.

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Date of creation: Feb 2007
Publication status: published as Andrew Ang & Geert Bekaert, 2004. "The term structure of real rates and expected inflation," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
Handle: RePEc:nbr:nberwo:12930
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