How Important are Inflation Expectations for the Nominal Yield Curve?
Subject
Finance
Publishing details
Wharton University of Pennsylvania Working Papers
Authors / Editors
Gomez-Cram R;Yaron A
Biographies
Publication Year
2017
Abstract
Less than you think. Macro-finance term structure models rely too heavily on the volatility of expected inflation news as a source for variations in nominal yield shocks. This paper develops and estimates a model featuring inflation non-neutrality and preference shocks. Stochastic volatility of inflation and consumption govern bond risk premia movements, while preference shocks generate volatile nominal yields. The model accounts for key bond market features, without resorting to an overly dominating expected inflation channel. The estimation shows that preference shocks are correlated with market distress factors, and that in the last two decades, inflation-related risks played a secondary role.
Series
Wharton University of Pennsylvania Working Papers
Available on ECCH
No
