This paper presents and estimates an innovative term structure model where inflation expectations and inflation risk premia are strictly interconnected with both the time-varying volatility of interest rates and investors’ expectations of future GDP growth. The estimation of the model is based on U.S. data over the 1999 to 2012 sample period. Distinct from previous studies, the empirical work explicitly considers data on both the implied volatility of Treasury bonds and survey forecasts of GDP growth, as well as data on nominal Treasury yields, TIPS yields and survey forecasts of CPI inflation. The estimated inflation risk premia, which are relatively low and less volatile with respect to earlier empirical evidence, are negatively related to the volatility of interest rates and have a strongly positive link with the stochastic conditional mean of GDP growth.
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