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Working Paper

The Term Structure of Inflation Compensation in the Nominal Yield Curve

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We propose a DSGE model with regime switching in the central bank’s inflation target to explain inflation compensation in the UK. Taking advantage of the well-documented change in UK monetary policy to adopt inflation targeting, we estimate our model using nominal and inflation-linked Treasury bond data from the UK from 1985 to 2007. We find that this model can account for the term structure of inflation compensation in the nominal yield curve by generating regime-dependent conditional expectations of future inflation.
Topics
Inflation
Econometrics modeling and forecasting
10.29.2011ISSN 2573-7953 WP 11-33DOI 10.26509/frbc-wp-201133
Keywords term structure of interest rates, real yield curve, inflation risk premia, regime-switching dsge model, bayesian estimation, inflation target
JEL Classification Codes E31, E43, E52, G12

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Pasaogullari, Mehmet, and Simeon Tsonev. 2011. “The Term Structure of Inflation Compensation in the Nominal Yield Curve.” Federal Reserve Bank of Cleveland, Working Paper No. 11-33. https://doi.org/10.26509/frbc-wp-201133