Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2015-05-29
Number: 15-066/VI
Author-Name: Casper de Vries
Author-Workplace-Name: Erasmus University Rotterdam, the Netherlands
Author-Name: Xuedong Wang
Author-Workplace-Name: Erasmus University Rotterdam, the Netherlands
Title: Inflation, Endogenous Market Segmentation and the Term Structure of Interest Rates
Abstract: The term structure of interest rates does not adhere to the expectations hypothesis, possibly due to a risk premium. We consider the implications of a risk premium that arises from endogenous market segmentation driven by variable inflation rates. In the absence of autocorrelation in inflation, the risk premium is constant. If inflation is correlated, however, the risk premium becomes time varying and we can rationalize the failure of the expectations hypothesis. Indirect empirical tests of the model’s implications are provided.
Classification-JEL: E43, G12
Keywords: Expectations hypothesis, Term structure, Time-Varying Risk Premia, Segmented markets, Inflation
File-Url: https://papers.tinbergen.nl/15066.pdf
File-Format: application/pdf
File-Size: 1132105 bytes
Handle: RePEc:tin:wpaper:20150066