Title: How Important are Inflation Expectations for the Nominal Yield Curve?
Abstract: Less than you think. Relative to the data, standard macro-finance term structure models rely too heavily on the volatility of expected inflation news as a source for variations in nominal yield shocks. In this paper, I develop a nonlinear Bayesian state-space model that accounts for several bond market features, without resorting to an expected inflation channel that counterfactually dominates the variation in nominal yield shocks. The estimation of the model suggests that, for the last two decades, inflation-related risk factors have not played an important role in driving either expected excess bond returns or the term premium component of the nominal yield curve.