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The Term Structure of Real Rates and Expected Inflation

Andrew Ang, Geert Bekaert and Min Wei
The Journal of Finance
Vol. 63, No. 2 (Apr., 2008), pp. 797-849
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/25094457
Page Count: 53
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
The Term Structure of Real Rates and Expected Inflation
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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 United States 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.

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