Inflation regimes in the US term structure of interest rates

This paper investigates how the regime shifts in the term structure of interest rates are related to changes in monetary policy. For this purpose, this paper introduces regime shifts into a cointegrated VAR model of the term structure. We argue that the short-run dynamics of the cointegrated model are likely to shift across regimes while the equilibrium relation implied by the expectations hypothesis of the term structure is robust to regime shifts. We find significant shifts in risk premia and interest rate volatility. These regime shifts reflect changing inflation expectations and shifts in the stance of monetary policy, respectively.