decomposing the declining volatility of long term inflation expectations abstract the level and volatility of survey based measures of long term inflation expectations have come down dramatically over the past several decades to capture these changes in inflation dynamics we embed both short and long term expectations into a medium scale var model with stochastic volatility the model estimates attribute most of the marked decline in the volatility of expectations to smaller shocks to long run inflation expectations according to our estimates the volatility of shocks plummeted in the early to mid 1980s moved to a somewhat higher level that prevailed for much of the 1990s and then declined to and remained at very low levels

the long run relationship between nominal interest rates and inflation the fisher equation revisited stable url http links jstor org sici sici 0022 2879 28199602 2928 3a1 3c102 3atlrbni 3e2 0 co 3b2 2journal of money credit and banking is currently published by ohio state university press your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals ohio press html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgmon aug 27 13 58 08 2007

cointegration and the us term structure abstract using the maximum likelihood analysis of cointegration developed by johansen 1988 1991 we test the cointegration implications of the expectations hypothesis of the term structure on a sample of us pure discount yields by using this approach we are able to analyze systems of more than two interest rates simultaneously as opposed to most previous studies which examine interest rates only in pairs one of the main results is that for the period 1952 1987 the cointegration implications generally seem to hold

time variation in the inflation passthrough of energy prices from bayesian estimates of a vector autoregression var which allows for both coefficient drift and stochastic volatility we obtain the following three results first beginning in approximately 1975 the responsiveness of core inflation to changes in energy prices in the united states fell rapidly and remains muted second this decline in the passthrough of energy inflation to core prices has been sustained through a recent period of markedly higher volatility of shocks to energy inflation finally reduced energy inflation passthrough has persisted in the face of monetary policy which quickly became less responsive to energy inflation starting around 1985

no arbitrage near cointegrated var p term structure models term premia and gdp growth abstract the recent macro finance literature does not agree either about the empirical properties of the expectation part and of the term premium on long term bonds or about the importance or even the direction of the relationship between the term premium and future economic activity this paper proposes a two step approach to handle both problems first in a var setting we extract a reliable measure of the term premium by means of averaging estimator techniques aiming at optimally solving prediction problems when highly persistent processes are present and thus providing a so called near cointegrated var p approach second we analyze the dynamic response of gdp to shocks to the term premium by using the new information response function concept as far as the first problem is concerned we find that the ncvar based term premium measure is rather stable and counter cyclical as suggested by interest rates survey based estimation of yield curve models and by its risk compensation role regarding the second problem we find that an increase in the long term spread caused by the term premium induces two effects on future economic activity the impact is negative for short horizons less than 1 year whereas it is positive for longer ones

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

real time density forecasts from bayesian vector autoregressions with stochastic volatility central banks and other forecasters are increasingly interested in various aspects of density forecasts however recent sharp changes in macroeconomic volatility including the great moderation and the more recent sharp rise in volatility associated with increased variation in energy prices and the deep global recession pose significant challenges to density forecasting accordingly this paper examines with real time data density forecasts of u s gdp growth unemployment inflation and the federal funds rate from bayesian vector autoregression bvar models with stochastic volatility the results indicate that adding stochastic volatility to bvars materially improves the real time accuracy of density forecasts this article has supplementary material online

a joint model for the term structure of interest rates and the macroeconomy we present and estimate a continuous time term structure model that incorporates observable macroeconomic variables and latent variables with a clear macroeconomic interpretation our model is able to accurately describe the joint dynamics for us macroeconomic variables and the yield curve however the observable variables do not explain the long end of the term structure central tendencies of these macroeconomic variables do a much better job in this respect these unobservable factors also play an important role in the description of the interest rate policy rule both observable and non observable factors determine the risk premia and hence bond excess holding returns copyright 2006 john wiley sons ltd

an equilibrium model of bond pricing and a test of market efficiency in two previous and related papers 3 4 the authors have reported the results of estimating a particular equilibrium model of bond pricing using quarterly data on canadian government bonds for the period 1964 to 1979 this paper reports the results of applying a similar model to the pricing of u s government bonds for the period 1958 1979 using data from the crsp government bond file the paper also extends the previous empirical analysis by evaluating the ability of the pricing model to detect underpriced and overpriced bonds the data reveal a strong relation between price prediction errors and subsequent bond returns

macroeconomics and the term structure this paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance the topic is important to investors and also to policymakers who wish to extract macroeconomic expectations from longer term interest rates and take actions to influence those rates the simplest model of the term structure is the expectations hypothesis which posits that long term interest rates are expectations of future aver age short term rates in this paper we show that many features of the configuration of interest rates are puzzling from the perspective of the expectations hypothesis we review models that explain these anomalies using time varying risk premia although the quest for the fundamental macroeconomic explanations of these risk premia is ongoing inflation uncertainty seems to play a large role finally while modern finance theory prices bonds and other assets in a single unified framework we also consider an earlier approach based on segmented markets market segmentation seems important to understand the term structure of interest rates during the recent financial crisis jel e31 e43 e52 e58

uncovering the us term premium an alternative route abstract the estimates of the us term premium crucially depend upon the ex ante decision on whether the short term rate is either an i 0 or an i 1 process in this paper we estimate a fractionally integrated i d model which simultaneously determines both the order of integration of the short term rate and the associated term premium we show that the term premium experienced a sharp increase from essentially zero in mid 2007 to almost 3 in 2009 we also show that unemployment and term premium dynamics exhibit a very significant positive co movement

why does the yield curve predict output and inflation the slope of the yield curve has been shown empirically to be a significant predictor of inflation and real economic activity but there is no standard theory as to why the relationship exists this article constructs an analytical rational expectations model to investigate the reasons for the empirical results the model suggests that the relationships are not structural but are instead influenced by the monetary policy regime however the yield curve should have predictive power for output and inflation in most circumstances various implications of the theoretical model are tested and confirmed empirically

effective use of survey information in estimating the evolution of expected inflation the evolution of the term structure of expected u s inflation is modeled using survey data to provide timely information on structural change not contained in lagged inflation data to capture shifts in subjective perceptions the model is adaptive to long horizon survey expectations however even short horizon survey expectations inform shifting endpoint estimates that capture the lag between inflation and the perceived inflation target which anchors inflation expectations results show movements of the perceived target are an important source of inflation persistence and suggest historical u s monetary policy was not fully credible for much of the postwar sample

new keynesian macroeconomics and the term structure this article complements the structural new keynesian macro framework with a no arbitrage affine term structure model whereas our methodology is general we focus on an extended macro model with an unobservable time varying inflation target and the natural rate of output which are filtered from macro and term structure data we obtain large and significant estimates of the phillips curve and real interest rate response parameters our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks the inflation target dominates the variation in the level factor whereas the monetary policy shocks dominate the variation in the slope and curvature factors

monetary policy bond risk premia and the economy within an affine model of the term structure of interest rates where bond yields get driven by observable and unobservable macroeconomic factors parameter restrictions help identify the effects of monetary policy and other structural disturbances on output inflation and interest rates and decompose movements in long term rates into terms attributable to changing expected future short rates versus risk premia when estimated the model highlights a broad range of channels through which monetary policy affects risk premia and the economy risk premia affect monetary policy and the economy and the economy affects monetary policy and risk premia

time varying yield curve dynamics and monetary policy monetary policy the yield curve and the private sector behaviour of the us economy are modelled as a time varying structural vector autoregression the monetary policy shocks of the early 1980s explain a large portion of the persistence of inflation and the level of the term structure changes in inflation expectations implied by the yield curve account for the persistence of the federal funds rate failures of the expectations hypothesis are rare and coincided with the credibility building of paul volcker s fed tenure at the beginning of the 1980s and the sequence of consecutive policy rate cuts around the time of the early 1990s recession copyright 2009 john wiley sons ltd

term premia and inflation uncertainty empirical evidence from an international panel dataset this paper provides cross country empirical evidence on bond risk premia i construct a panel of zero coupon nominal government bond yields spanning ten industrialized countries and nearly two decades i hence compute forward rates and then use two different methods to decompose these forward rates into expected future short term interest rates and term premiums the first method uses an affine term structure model with macroeconomic variables as unspanned risk factors the second method uses surveys i find that term premium estimates declined across countries over the sample period especially in countries that appear to have reduced inflation uncertainty by making substantial changes in the monetary policy frameworks of their central banks during the recent financial crisis term premiums have remained flat and even declined further in some countries perhaps reflecting the effects of quantitative easing actions by many central banks

monk mortgages in a new keynesian model abstract there has been much interest recently in the role of household long term mortgage debt in the transmission of monetary policy this paper offers a tractable framework that integrates the long term debt channel with the standard new keynesian channel providing a tool for monetary policy analysis that reflects the recent debates in the literature as there is a nontrivial role in the model for both short and long term debt it provides a laboratory to investigate the effects of monetary policy operating not only through its current short term actions but also through expected persistent changes in its stance

inflation expectations real rates and risk premia evidence from inflation swaps this paper develops a model of the term structures of nominal and real interest rates driven by state variables representing the short term real interest rate expected inflation inflation s central tendency and four volatility factors that follow garch processes we derive analytical solutions for nominal bond yields yields on inflation indexed bonds that have an indexation lag and the term structure of expected inflation unlike prior studies the model s parameters are estimated using data on inflation swap rates as well as nominal yields and survey forecasts of inflation the volatility state variables fully determine bonds time varying risk premia and allow for stochastic volatility and correlation between bond yields yet they have small effects on the cross section of nominal yields allowing for time varying volatility is particularly important for real interest rate and expected inflation processes but long horizon real and inflation risk premia are relatively stable

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

some implications of learning for price stability abstract survey data on expectations of a range of macroeconomic variables exhibit low frequency drift in a new keynesian model consistent with these empirical properties optimal policy in general delivers a positive inflation rate in the long run two special cases deliver classic outcomes under rational expectations as the degree of low frequency variation in beliefs goes to zero the long run inflation rate coincides with the inflation bias under optimal discretion for non zero low frequency drift in beliefs as households become highly patient valuing utility in any period equally the optimal long run inflation rate coincides with optimal commitment price stability is optimal the optimal state contingent response to cost push disturbances similarly reflects properties of optimal discretion and optimal commitment depending on the degree of low frequency variation in beliefs when beliefs exhibit substantial variation in response to short run forecast errors optimal policy is closer to commitment

the empirical failure of the expectations hypothesis of the term structure of bond yields this paper tests the expectations hypothesis eh using us monthly data for bond yields spanning the 1952 2003 sample period and ranging in maturity from 1 month to 10 years we apply the lagrange multiplier test developed by bekaert and hodrick 2001 and extend it to increase the test power a by introducing economic variables as conditioning information and b by using more than two bond yields in the model and testing the eh jointly on more than one pair of yields while the conventional bivariate procedure provides mixed results the more powerful testing procedures suggest rejection of the eh throughout the maturity spectrum examined

economic growth and the structure of long term development this volume collects some of the papers presented at the 82nd round table conference of the international economic association that was organised in collaboration with fondazione eni enrico mattei the book considers different approaches to the analysis of economic growth and it is organised in five parts par i is devoted to empirical evidence part ii contains six papers which present a series of models based on different approaches but with special emphasis on endogenous growth and on schumpeterian models of growth and fluctuations part iii of the book is devoted to the impact of international trade on economic development part iv examines the effects of economic development on the natural environment the final part of the book part v contains the concluding evaluations contributors p aghion r aversi d ben david g bertola o castellino f donati g dosi w easterly s fabiani c freeman r goodwin j helliwell e helpman p howitt r king m landesmann r levine s lombardini k g maler w d nordhaus l l pasinetti s rebelo a sen l soete r m solow m syrquin b verspagen s zervos

measuring the world natural rate of interest this article makes the first attempt to estimate the time varying natural rate jointly with the output gap and trend potential output growth for the world as a whole using a simple unobserved components model broadly following the methodology developed by laubach t and j williams measuring the natural rate of interest review of economics and statistics 85 4 2003 1063 1070 we find that the world natural rate has been trending down for the past few decades over a quarter of the variation in the natural rate is accounted for by the trend potential output growth rate however the relationship between the world natural interest rate and the world trend growth is modest and not statistically significant jel e4 e52 e32 c32

macro factors and the term structure of interest rates this paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long run expectations the model extends the approach pioneered by kozicki and tinsley 2001 by modeling consistently long run inflation expectations simultaneously with the term structure application to the u s economy shows the importance of long run inflation expectations in the modeling of long term bond yields the paper also provides a macroeconomic interpretation for the latent factors found in standard finance models of the yield curve the level factor represents the long run inflation expectation of agents the slope factor captures business cycle conditions and the curvature factor expresses a clear independent monetary policy factor

changes in the federal reserve s inflation target causes and consequences this paper estimates a new keynesian model to draw inferences about the behavior of the federal reserve s unobserved inflation target the results indicate that the target rose from 1 1 4 percent in 1959 to over 8 percent in the mid to late 1970s before falling back below 2 1 2 percent in 2004 the results also provide some support for the hypothesis that over the entire postwar period federal reserve policy has systematically translated short run price pressures set off by supply side shocks into more persistent movements in inflation itself although considerable uncertainty remains about the true source of shifts in the inflation target jel e31 e32 e52

macroeconomic models and the yield curve an assessment of the fit abstract many have questioned the empirical relevance of the calvo yun model this paper adds a term structure to three widely studied macroeconomic models calvo yun hybrid and svensson we back out from observations on the yield curve the underlying macroeconomic model that most closely matches the level slope and curvature of the yield curve with each model we trace the response of the yield curve to macroeconomic shocks we assess the fit of each model against the observed behaviour of interest rates and find limited support for the calvo yun model in terms of fit with the observed yield curve we find some support for the hybrid model but the svensson model performs best

term premia and inflation uncertainty empirical evidence from an international panel dataset comment term premia implied by maximum likelihood estimates of affine term structure models are misleading because of small sample bias we show that accounting for this bias alters the conclusions about the trend cycle and macroeconomic determinants of the term premia estimated in wright 2011 his term premium estimates are essentially acyclical and often just parallel the secular trend in longterm interest rates in contrast bias corrected term premia show pronounced countercyclical behavior consistent with theoretical and empirical arguments about movements in risk premia jel e31 e43 e52 g12 h63 in an important recent paper wright 2011 presents a new international interest rate dataset and estimates term premia in far ahead forward rates using an affine gaussian dynamic term structure model dtsm as well as a survey based method he then relates these empirical term premia to macroeconomic conditions notably inflation uncertainty in particular he shows that the marked secular decline in estimated forward term premia across countries is correlated with decreases in measures of uncertainty around forecasts of future inflation in this comment we demonstrate that his model based term premium estimates are distorted by smallsample bias in the estimated model parameters accounting for this bias changes the behavior of the resulting term premium estimates in terms of their trend and cyclical behavior in an affine gaussian dtsm bond yields are determined by a small number of risk factors and the dynamic evolution of these risk factors follows a gaussian vector autoregression var if the risk factors in such a model are observable and if the model is maximally flexible i e if it has no parameter restrictions beyond those required for identification we know from joslin singleton and zhu 2011 that the maximum likelihood estimates of the var parameters can be found by

asymmetric monetary policy and the yield curve we discuss the taylor rule near low inflation and interest rates using an additional option like term in the federal reserve s loss function i e the deflation put we extend the classic taylor rule to one with an asymmetric response that is more accommodative when the inflation rate is very low once calibrated this payoff profile gives an exact and easily communicable prescription for federal reserve policy under regimes of low inflation simple models of central bank behavior can produce highly complex yield curve shapes using the usual taylor rule and our proposed extension as building blocks we construct a robust framework for generating realistic yield curves and the evolution of the economy our main focus is the impact on the yield curve and the economy of the deflation put we find that for economies like the u s the deflation put reduces yields for all maturities we also find that in highly leveraged economies such as japan the consequence of an asymmetric deflation fighting policy may result in improved economic conditions but also raises the possibility of higher longterm yields as a consequence

restrictions on risk prices in dynamic term structure models restrictions on the risk pricing in dynamic term structure models dtsms tighten the link between cross sectional and time series variation of interest rates and make absence of arbitrage useful for inference about expectations this article presents a new econometric framework for estimation of affine gaussian dtsms under restrictions on risk prices which addresses the issues of a large model space and of model uncertainty using a bayesian approach a simulation study demonstrates the good performance of the proposed method data for u s treasury yields calls for tight restrictions on risk pricing only level risk is priced and only changes in the slope affect term premia incorporating the restrictions changes the model implied short rate expectations and term premia interest rate persistence is higher than in a maximally flexible model hence expectations of future short rates are more variable restrictions on risk prices help resolve the puzzle of implausibly stable short rate expectations in th

imperfect credibility and inflation persistence in this paper we formulate a dynamic general equilibrium model with staggered nominal contracts in which households and rms use optimal ltering to disentangle persistent and transitory shifts in the monetary policy rule the calibrated model accounts quite well for the dynamics of output and insation during the volcker disinsation and implies a sacri ce ratio very close to the estimated value our approach indicates that insation persistence and substantial costs of disinsation can be generated in an optimizing agent framework without relaxing the assumption of rational expectations or relying on arbitrary modi cations to the aggregate supply relation jel classi cation e31 e32 e52

an open economy macro finance model of international interdependence the oecd us and the uk abstract this paper develops a multi country macro finance model to study international economic and financial linkages this approach models the economy and financial markets jointly using both types of data to throw light on such issues the world economy is modelled using data for the us and aggregate oecd economies as well as the us treasury bond market using latent variables to represent a common inflation trend and a us real interest rate factor we find strong evidence of global effects on both the us and uk calling into question the standard closed economy macro finance specification these economic linkages also help to explain the co movement of yields in the us and uk treasury bond markets

information in the yield curve a macro finance approach this paper uses an a ne term structure model that incorporates macroeconomic and nancial factors to study the term premium in the u s bond market the results corroborate the known rejection of the expectation hypothesis and indicate that one factor closely related to the cochrane and piazzesi 2005 factor the cp factor is responsible for most of the variation in bond premia furthermore the model implied bond premia are able to explain around 32 and 40 of the variability of one and two year excess returns and their outof sample performance is comparable to the one obtained with the cp factor the model is also used to decompose yield spreads into an expectations and a term premium component in order to forecast gdp growth and in ation although this decomposition does not seem important to forecast gdp growth it is crucial to forecast in ation for most forecasting horizons also the inclusion of control variables such as the short term interest rate and lagged variables does not drive out the predictive power of the yield spread decomposition

benchmarking the expectations hypothesis of the interest rate term structure an analysis of cointegration vectors i test cointegration restrictions that are consistent with the expectations hypothesis of the term structure by employing the full information maximum likelihood methods developed by johansen yield curves appear to be the result of cointegration among interest rates the cointegration vectors that best describe the long term impact of interest rate levels on interest rate changes can often be written as linear combinations of interest rate spreads there is however difficulty in keeping short term yields in such a restricted cointegrated system with other interest rates short term speculative returns from long term bonds do not conform to the expectations hypothesis

stochastic volatility in a macro finance model of the u s term structure of interest rates 1961 2004 this paper generalizes the standard homoscedastic macro finance model by allowing for stochastic volatility using the square root specification of the mainstream finance literature empirically this specification dominates the standard model because it is consistent with the square root volatility found in macroeconomic time series thus it establishes an important connection between the stochastic volatility of the mainstream finance model and macro economic volatility of the okun friedman type this research opens the way to a richer specification of both macro economic and term structure models incorporating the best features of both macro finance and mainstream finance models

macro factors and the affine term structure of interest rates this paper formulates an affine term structure model of bond yields from a dynamic stochastic general equilibrium model with observable macro state variables as the term structure factors model implications for the joint macro term structure dynamics are consistent with the empirical patterns from the var estimation model calibration and simulation exercises also provide clear macroeconomic interpretations of the latent term structure factors as found in the finance literature most of the slope factor movement can be explained by exogenous monetary policy shocks and the level factor movement is closely related to the technology shocks

a defense of traditional hypotheses about the term structure of interest rates expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time under the former interpretation different versions of the expectations theory of the term structure are inconsistent with one another but i show that this does not necessarily carry over to the constant risk premium interpretation of the theory i present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity furthermore i argue that differences among expectations theories are secondorder effects of bond yield variability i develop an approximate linearized framework for analysis of the term structure in which these differences disappear and i test its accuracy in practice using data from the crsp government bond tapes in a well known article in this journal cox ingersoll and ross cir 4 reexamine and find wanting certain hypotheses about the term structure of interest rates a striking feature of cir s re examination is that it is entirely theoretical cir show that different versions of the pure expectations theory of the term structure which traditionally were regarded as equivalent are in fact inconsistent with one another when interest rates are random furthermore in a fairly general continuous time arbitrage pricing framework when interest rates are random all versions of the theory except one are incompatible with equilibrium at first sight cir s results appear to be devastating to traditional empirical work on the term structure they suggest that researchers must specify arbitrage pricing models with a small number of state variables before proceeding to empirical work such models must restrict not only the deterministic components

shifting endpoints in the term structure of interest rates abstract this paper links the term structure to perceptions of monetary policy long horizon forecasts of short rates required by no arbitrage term structure models are heavily influenced by the endpoints or limiting conditional forecasts of the short rate process common assumptions that the short rate is mean reverting or contains a unit root are shown to generate unrealistic yield predictions failures occur because these assumptions inadequately account for historical shifts in market perceptions of the policy target for inflation this paper links endpoint shifts to agent learning about shifts in long term policy goals shifting endpoints in short rate processes significantly improve yield predictions

a new model of inflation trend inflation and long run inflation expectations a knowledge of the level of trend inflation is key to many current policy decisions and several methods of estimating trend inflation exist this paper adds to the growing literature which uses survey based long run forecasts of inflation to estimate trend inflation we develop a bivariate model of inflation and long run forecasts of inflation which allows for the estimation of the link between trend inflation and the long run forecast thus our model allows for the possibilities that long run forecasts taken from surveys can be equated with trend inflation that the two are completely unrelated or anything in between by including stochastic volatility and time variation in coefficients it extends existing methods in empirically important ways we use our model with a variety of inflation measures and survey based forecasts for several countries we find that long run forecasts can provide substantial help in refining estimates and fitting and forecasting inflation the same evidence indicates it is less helpful to simply equate trend inflation with the long run forecasts

the volatility of long term bond returns persistent interest shocks and time varying risk premiums we develop an almost affine term structure model with a closed form solution for factor loadings in which the spot rate and the risk price are fractionally integrated processes with different integration orders this model is used to explain two stylized facts first predictability of longterm excess bond returns requires sufficient volatility and persistence in the risk price second the large volatility of long term bond returns requires persistence in the spot rate decomposing long term bond returns we find that the expectations component from the level factor is more volatile than returns themselves and that the risk premium correlates negatively with level factor innovations

an exact bond option formula this paper derives a closed form solution for european options on pure discount bonds assuming a mean reverting gaussian interest rate model as in vasicek 8 the formula is extended to european options on discount bond portfolios

a structural decomposition of the us yield curve abstract by expanding the macro part of macro finance models historical fluctuations in us bond yields turn out to be largely consistent with the rational expectations hypothesis we estimate a medium scale macro finance dsge model of the term structure to establish this our finding contrasts with existing macro finance models and suggests that their small scale or non structural perspective on the macroeconomy mutes expectations thereby underestimating the expectations hypothesis potential out of sample forecasts are competitive with more flexible term structure models given the empirical validation we interpret various episodes through the lens of the model and investigate which structural shocks cause the yield curve to contain information about future growth

fitting observed inflation expectations abstract the paper provides evidence on the extent to which inflation expectations generated by a standard christiano et al 2005 smets and wouters 2003 type dsge model are in line with what observed in the data we consider three variants of this model that differ in terms of the behavior of and the public s information on the central banks inflation target allegedly a key determinant of inflation expectations we find that i time variation in the inflation target is needed to capture the evolution of expectations during the post volcker period ii the variant where agents have imperfect information is strongly rejected by the data iii inflation expectations appear to contain information that is not present in the other series used in estimation and iv none of the models fully capture the dynamics of this variable

do expected shifts in inflation affect estimates of the long run fisher relation recent empirical studies suggest that nominal interest rates and expected inflation do not move together one for one in the long run a finding at odds with many theoretical models this article shows that these results can be deceptive when the process followed by inflation shifts infrequently we characterize the shifts in inflation by a markov switching model based upon this model s forecasts we reexamine the long run relationship between nominal interest rates and inflation interestingly we are unable to reject the hypothesis that in the long run nominal interest rates reflect expected inflation one for one

learning and the yield curve two central implications of expectations hypothesis under rational expectations are inconsistent with yield curve data i future expected long yields fall instead of rising when yield spread rises ii long yields are excessively volatile relative to short yields i propose an optimization framework in which boundedly rational agents use adaptive learning to form expectations the belief structure rationalizes pattern of yields observed in the data so that the first puzzle does not arise with subjective expectations intertemporal income and substitution effects are amplified relative to rational expectations the second puzzle is partly accounted for by extra volatility due to parameter uncertainty

perhaps the 1970s fomc did what it said it did briefing forecasts prepared for the federal open market committee fomc are used to estimate changes in the design of us monetary policy and in the implied policy target for inflation from 1970 through 1997 both estimated policy rate responses and fomc transcripts are consistent with intermediate targeting of monetary aggregates throughout the great inflation of the 1970s the unpublished fomc targets for m1 growth are tabulated empirical results support an effective inflation target of roughly 7 in the 1970s and 3 thereafter a notable difference in the 1970s monetary policies of the us and germany is the absence of explicit public objectives for us long run inflation

accounting for a shift in term structure behavior with no arbitrage and macro finance models this paper examines a shift in the dynamics of the term structure of interest rates in the u s during the mid 1980s we document this shift using standard interest rate regressions and using dynamic a ne no arbitrage models estimated for the pre and post shift subsamples the term structure shift largely appears to be the result of changes in the pricing of risk associated with a level factor using a macro nance model we suggest a link between this shift in term structure behavior and changes in the dynamics and risk pricing of the federal reserve s in ation target as perceived by investors

term structure views of monetary policy under alternative models of agent expectations abstract term structure models and many descriptions of the transmission of monetary policy rest on the empirical relevance of the expectations hypothesis small differences in the perceived policy reaction function in var models of agent expectations strongly influence the relevance in the transmission mechanism of the expected short rate component of bond yields mean reverting or difference stationary characterizations of interest rates require large and volatile term premiums to match the observable term structure however short rate descriptions that capture shifting perceptions of long horizon inflation evident in survey data support a more substantial term structure role for short rate expectations

extracting inflation expectations and inflation risk premia from the term structure a joint model of the uk nominal and real yield curves abstract this paper analyses the uk interest rate term structure over the period since october 1992 when the united kingdom adopted an explicit inflation target using an affine term structure model estimated using both government bond yields and survey data the model imposes no arbitrage restrictions across nominal and real yields which enables interest rates to be decomposed into expected real policy rates expected inflation real term premia and inflation risk premia the model is used to shed light on major developments over the period including the impact of bank of england independence and the low real bond yield conundrum

the term structure of commercial paper rates this paper tests the expectations hypothesis in the market for commercial paper our main dataset which is new to the literature consists of daily indexes constructed from the actual market yields for nearly all commercial paper issued by u s corporations between january 1998 and august 2003 we show that the term premia built into commercial paper yields rise dramatically at year end causing the expectations hypothesis to be rejected however once we control for these predictable year end eects we nd the reverse that commercial paper yields largely conform with the expectations hypothesis