Are Indexed Bonds Really Inflation Proof? A Model of Real and Nominal Term Structures when Money has Real Effects

Are Indexed Bonds Really Inflation Proof? A Model of Real and Nominal Term Structures when Money... This paper studies the general behavior of the nominal and real term structures of interest rates in a general equilibrium framework. A central bank is introduced in the model as an agent facing a tradeoff between inflation and output and choosing a monetary policy variable. Prices and output are jointly determined in our model endogenously. Two multi-factor nominal and real term structure models are given as examples to illustrate the general model. In our economies, inflation indexed bonds are not completely inflation proof, but are still subject to the influence of inflation uncertainties. The models offer us an empirical framework that can be studied with indexed bond data and nominal bond data together in a single estimation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Are Indexed Bonds Really Inflation Proof? A Model of Real and Nominal Term Structures when Money has Real Effects

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1024859706116
Publisher site
See Article on Publisher Site

Abstract

This paper studies the general behavior of the nominal and real term structures of interest rates in a general equilibrium framework. A central bank is introduced in the model as an agent facing a tradeoff between inflation and output and choosing a monetary policy variable. Prices and output are jointly determined in our model endogenously. Two multi-factor nominal and real term structure models are given as examples to illustrate the general model. In our economies, inflation indexed bonds are not completely inflation proof, but are still subject to the influence of inflation uncertainties. The models offer us an empirical framework that can be studied with indexed bond data and nominal bond data together in a single estimation.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 4, 2004

References

  • Inflation, Asset Prices, and the Term Structure of Interest Rates in Monetary Economics
    Bakshi, G. S.; Chen, Z.

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