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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. The authors 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.
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