Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset

• Published in: The American economic review Vol. 101; no. 4; pp. 1514 - 1534
• Main Author: Wright, Jonathan H.
• Format: Journal Article
• Language: English
• Published: Nashville American Economic Association 01-06-2011
• Subjects: Asset pricing; Bond market; Bond markets; Central banks; Datasets; Economic expectations; Economic inflation; Economic models; Economic surveys; Estimates; Federal Reserve monetary policy; Government bonds; Gross domestic product; Inflation; Inflation rates; Interest rates; International finance; Macroeconomics; Monetary policy; Monetary theory; Shorter Papers; Studies; Treasury bills; Yield curve; Yield curves
• ISSN: 0002-8282; 1944-7981
• DOI: 10.1257/aer.101.4.1514

This paper provides cross-country empirical evidence on term premia. I construct a panel of zero-coupon nominal government bond yields spanning ten industrialized countries and nearly two decades. I hence compute forward rates and use two different methods to decompose these forward rates into expected future short-term interest rates and term premiums. The first method uses an affine term structure model with macroeconomic variables as unspanned risk factors; the second method uses surveys. I find that term premiums declined internationally over the sample period, especially in countries that apparently reduced inflation uncertainty by making substantial changes in their monetary policy frameworks. (JEL E13, E43, E52, G12, H63) [PUBLICATION ABSTRACT]