UK term structure decompositions at the zero lower bound

This paper employs a zero lower bound (ZLB) consistent shadow-rate model to decompose UK nominal yields into expectation and term premium components. Compared to a standard affine term structure model, it performs relatively better in a ZLB setting by capturing the stylized facts of the yield curve....

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Bibliographic Details
Published in:	Journal of applied econometrics (Chichester, England) Vol. 33; no. 5; pp. 643 - 661
Main Authors:	Carriero, Andrea, Mouabbi, Sarah, Vangelista, Elisabetta
Format:	Journal Article
Language:	English
Published:	Chichester Wiley (Variant) 01-08-2018 Wiley Periodicals Inc
Subjects:	Credibility Decomposition Econometrics Economic models Inflation Inflation expectations Inflation targeting Lower bounds Monetary policy Premiums RESEARCH ARTICLE Yield curve United Kingdom > UK
Online Access:	Get full text
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Summary:	This paper employs a zero lower bound (ZLB) consistent shadow-rate model to decompose UK nominal yields into expectation and term premium components. Compared to a standard affine term structure model, it performs relatively better in a ZLB setting by capturing the stylized facts of the yield curve. The ZLB model is then exploited to estimate inflation expectations and risk premiums. This entails jointly pricing and decomposing nominal and real UK yields. We find evidence that medium- and long-term inflation expectations are contained within narrower bounds since the early 1990s, suggesting monetary policy credibility improved after the introduction of inflation targeting.
ISSN:	0883-7252 1099-1255
DOI:	10.1002/jae.2635