The Term Structure of Real Rates and Expected Inflation

Andrew Ang, Geert Bekaert, Min Wei

NBER Working Paper No. 12930
Issued in February 2007
NBER Program(s):   AP   ME

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.

(376 K)

Published:

• Andrew Ang & Geert Bekaert, 2004. "The term structure of real rates and expected inflation," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. ,
• Andrew Ang & Geert Bekaert & Min Wei, 2008. "The Term Structure of Real Rates and Expected Inflation," Journal of Finance, American Finance Association, vol. 63(2), pages 797-849, 04.

This paper is available as PDF (376 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX