The effects of different inflation risk premiums on interest rate spreads

Date

2004

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Source Title

Physica A : Statistical Mechanics and its Applications

Print ISSN

0378-4371

Electronic ISSN

1873-2119

Publisher

Elsevier BV

Volume

333

Issue

1-4

Pages

317 - 324

Language

English

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Abstract

This paper analyzes how the different types of inflation uncertainty affect a set of interest rate spreads for the UK. Three types of inflation uncertainty - structural uncertainty, impulse uncertainty, and steady-state inflation uncertainty - are defined and derived by using a time-varying parameter model with a GARCH specification. It is found that both the structural and steady-state inflation uncertainties increase interest rate spreads, while the empirical evidence for the impulse uncertainty is not conclusive. © 2003 Elsevier B.V. All rights reserved.

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