THE RELATIONSHIP BETWEEN NOMINAL INTEREST RATES, REAL RATES AND INFLATION TERM STRUCTURE

Original scientific paper
Autor: Nataša Kožul PhD

Summary: Although yield curves are constructed daily, across all currencies and different investor classes, and are used as a measure of cost of borrowing for different maturities, very little is known about what drives the interest rates. As empirical research suggests that the rates comprising the yield curves are actually ‘nominal rates’ governed by the interplay between the ‘real rates’ and inflation expected for the corresponding time horizons, the question of how to determine these components and their participation in the nominal rates has prompted much work in this field. This paper aims to present various approaches to determining the composition of nominal interest rates and draw conclusions regarding the implication of these findings on the investment strategies and the economic outlook.

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