Real Rates, Expected Inflation, and Inflation Risk Premia

Authors

  • Martin D. D. Evans

    1. Department of Economics, Georgetown University, Washington DC
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    • Department of Economics, Georgetown University, Washington DC 20057. I would like to thank the Editor, an anonymous referee, seminar participants at Queen Mary College at the University of London, The London School of Economics, the C.E.P.R., and The Board of Governors of the Federal Reserve System for many useful comments and suggestions. This paper was written while visiting the Financial Markets Group at the L.S.E. and The Bank of England. I am grateful for the hospitality I received at both institutions and acknowledge the financial support of the Houblon-Norman Fund at the Bank of England.

Abstract

This paper studies the term structure of real rates, expected inflation, and inflation risk premia. The analysis is based on new estimates of the real term structure derived from the prices of index-linked and nominal debt in the U.K. I find strong evidence to reject both the Fisher Hypothesis and versions of the Expectations Hypothesis for real rates. The estimates also imply the presence of time-varying inflation risk premia throughout the term structure.

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