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American Economic Review: Vol. 104 No. 1 (January 2014)

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Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Comment

Article Citation

Bauer, Michael D., Glenn D. Rudebusch, and Jing Cynthia Wu. 2014. "Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Comment." American Economic Review, 104(1): 323-37.

DOI: 10.1257/aer.104.1.323

Abstract

Term premia implied by maximum likelihood estimates of affine term structure models are misleading because of small-sample bias. We show that accounting for this bias alters the conclusions about the trend, cycle, and macroeconomic determinants of the term premia estimated in Wright (2011). His term premium estimates are essentially acyclical, and often just parallel the secular trend in longterm interest rates. In contrast, bias-corrected term premia show pronounced countercyclical behavior, consistent with theoretical and empirical arguments about movements in risk premia.

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Authors

Bauer, Michael D. (Federal Reserve Bank of San Francisco)
Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco)
Wu, Jing Cynthia (U Chicago)

JEL Classifications

E31: Price Level; Inflation; Deflation
E43: Interest Rates: Determination, Term Structure, and Effects
E52: Monetary Policy
G12: Asset Pricing; Trading Volume; Bond Interest Rates
H63: National Debt; Debt Management; Sovereign Debt


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