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Inflation Forecast Errors and Time Variation in Term Premia

Published online by Cambridge University Press:  06 April 2009

Werner F. M. De Bondt  and
Mary M. Bange
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Abstract

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 4 , December 1992 , pp. 479 - 496
Copyright
Copyright © School of Business Administration, University of Washington 1992

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