Working Paper

The term structure of inflation compensation in the nominal yield curve

Abstract: We propose a DSGE model with regime switching in the central bank?s inflation target to explain inflation compensation in the UK. Taking advantage of the well-documented change in UK monetary policy to adopt inflation targeting, we estimate our model using nominal and inflation-linked Treasury bond data from the UK from 1985 to 2007. We find that this model can account for the term structure of inflation compensation in the nominal yield curve by generating regime-dependent conditional expectations of future inflation.

Keywords: Inflation targeting; Monetary policy - Great Britain;

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2011

Number: 1133