Term Structure of Interest Rates and Expected Inflation

Olesya V Grishchenko and Jing-Zhi Huang

In this chapter we report some developments in the modelling of the term structure of interest rates and expected inflation. We first review nominal term structure models and then we discuss models of real term structures and expected inflation, and illustrate how inflation expectations and risk premiums can be derived. Finally, we discuss the implications of this research for investors and monetary policymakers.


One of the most important aims in financial economics is to understand how expected bond returns move over time. For this purpose, a successful modelling of both short- and long-term bond yields (ie, the term structure) is called for. The literature on the term structure of nominal interest rates is vast, and the topic has developed into a separate field of financial economics since the 1990s. For the sake of brevity, we shall highlight only the key concepts and a few of the many influential papers that have shaped the evolution of the term structure modelling over time. Some of the mathematical derivations are provided in the appendixes.

From the short rate to the yield curve

A crucial idea underlining most of the term

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: