Inflation Forecast Errors and Time Variation in Term Premia

The expectations theory of the term structure is well known to give wrong signals as to the future course of long-term interest rates. One explanation involves rational time-varying term premia. However, the “anomaly” may also be due to inflation forecast errors. We study survey forecasts of inflati...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 1992-12, Vol.27 (4), p.479-496
Main Authors: De Bondt, Werner F. M., Bange, Mary M.
Format: Article
Language:English
Subjects:
Economic expectations
Economic forecasting
Economic surveys
Forecasting models
Forecasting standards
Forecasts
Government bonds
Inflation rates
Interest rates
Standard deviation
Statistical forecasts
Studies
Yield curves
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Summary:The expectations theory of the term structure is well known to give wrong signals as to the future course of long-term interest rates. One explanation involves rational time-varying term premia. However, the “anomaly” may also be due to inflation forecast errors. We study survey forecasts of inflation. It seems that the respondents' forecasts are insufficiently adaptive. Interest rates reflect expectations similar to the inflation forecasts. As a result, past survey forecast errors reliably predict premia on U.S. Government Bonds.
ISSN:0022-1090
1756-6916
DOI:10.2307/2331136