Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model


Term, Inflation, and Foreign Exchange Risk Premia: A Unified

Lars E.O. Svensson
Sveriges Riksbank,
Princeton University,
NBER Working Paper No. 4544

November 1993

The paper reviews the theoretical foundations of the use of forward interest rates to infer expected future rates of interest, inflation, currency depreciation and inflation differentials. Forward rates are related to these expected future variables via combinations of term, inflation and foreign exchange risk premia. A unified derivation, discussion and comparison of these premia is provided under both general and specific assumptions, as well as some comments on empirical estimation.