RDP 2018-02: Affine Endeavour: Estimating a Joint Model of the Nominal and Real Term Structures of Interest Rates in Australia 6. Conclusion

The model described in this paper can provide policymakers with market-implied measures of expectations for a number of key economic variables. The model provides plausible estimates, though it should be noted that the estimates are subject to a degree of uncertainty and so one should focus on the broad trends implied by the model rather than any specific point estimate.

The model suggests that expected real rates a number of years in the future, a market-based measure of the neutral real interest rate, have declined since the global financial crisis. Meanwhile, longer-term inflation expectations have remained within the 2 to 3 per cent target band and have been more stable than suggested by other measures such as break-even inflation.

The results also show that nominal term premia declined over the sample and that this occurred in two distinct phases. The decline over the mid-to-late 1990s and early 2000s reflected declines in both real and inflation risk premia, and coincided with the implementation of the Reserve Bank's inflation-targeting regime as well as reasonably strong and stable economic performance. The decline since the crisis mainly reflects lower real term premia and may reflect overseas factors given it has coincided with declines in US term premia.