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Estimating inflation risk premia from nominal and real yield curves using a shadow-rate model

April 16, 2015
Kei Imakubo*1
Jouchi Nakajima*2

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Abstract

This paper proposes and estimates an extended shadow-rate term structure model, and uses it to extract inflation risk premia from nominal and real term structures. Our model incorporates the shadow rate and thereby explicitly takes account of the zero lower bound constraint of nominal interest rates. The estimation results for Japan and the United States confirm that our model successfully avoids the estimation bias inherent in the standard affine-type term structure model that ignores the zero lower bound. As we theoretically and empirically demonstrate, the inflation risk premium is time-varying and takes both positive and negative values reflecting market concerns with regard to asymmetric uncertainty in future inflation.

JEL Classifications
E31, E43, E52, G12

Keywords
Arbitrage-free term structure; Inflation risk premium; Shadow rate; Term premium; Zero lower bound

We are grateful for the helpful comments from the staff of the Bank of Japan. The views expressed herein are those of the authors alone and do not necessarily reflect those of the Bank of Japan.

  •   *1 Monetary Affairs Department, Bank of Japan
    E-mail : kei.imakubo@boj.or.jp
  •   *2 Monetary Affairs Department, Bank of Japan
    E-mail : jouchi.nakajima@boj.or.jp

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