The Term Structure of Real Rates and Expected Inflation

68 Pages Posted: 24 Feb 2007 Last revised: 2 May 2021

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Geert Bekaert

Columbia Business School - Finance and Economics

Min Wei

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: February 2007

Abstract

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.

Suggested Citation

Ang, Andrew and Bekaert, Geert and Wei, Min, The Term Structure of Real Rates and Expected Inflation (February 2007). NBER Working Paper No. w12930, Available at SSRN: https://ssrn.com/abstract=965122

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Min Wei

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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