We present an affine term structure model for the joint pricing of real and nominal bond yields that explicitly accommodates liquidity risk premia. We estimate the model using a new, computationally efficient procedure that is based on return regressions. The model allows us to address a number of salient questions about the transmission of monetary policy. We show that variations in U.S. nominal term premia are primarily driven by variations in real term premia rather than inflation and liquidity risk premia. Nonetheless, adjusting breakevens for inflation and liquidity risk substantially improves forecasts of inflation. Our estimates imply that the Federal Reserve's large-scale asset purchases lowered Treasury yields primarily by reducing real term premia. Real term premia also account for the positive response of long-term real forward rates to surprise changes in the federal funds target. Applying our model to U.K. data, we find that the inflation risk premium dropped sharply when the Bank of England formally adopted an inflation target.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe present an affi ne term structure model for the joint pricing of Treasury Infl ation-Protected Securities (TIPS) and Treasury yield curves that adjusts for TIPS' relative illiquidity. Our estimation using linear regressions is computationally very fast and can accommodate unspanned factors. The baseline specifi cation with six principal components extracted from Treasury and TIPS yields, in combination with a liquidity factor, generates negligibly small pricing errors for both real and nominal yields. Model-implied expected infl ation provides a better prediction of actual infl ation than breakeven infl ation. The value of the defl ation fl oor calculated from the model is generally small in magnitude, but spiked during the recent crisis.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe present an affi ne term structure model for the joint pricing of Treasury Infl ation-Protected Securities (TIPS) and Treasury yield curves that adjusts for TIPS' relative illiquidity. Our estimation using linear regressions is computationally very fast and can accommodate unspanned factors. The baseline specifi cation with six principal components extracted from Treasury and TIPS yields, in combination with a liquidity factor, generates negligibly small pricing errors for both real and nominal yields. Model-implied expected infl ation provides a better prediction of actual infl ation than breakeven infl ation. The value of the defl ation fl oor calculated from the model is generally small in magnitude, but spiked during the recent crisis.