The effects of different inflation risk premiums on interest rate spreads

This paper analyzes how the different types of inflation uncertainty affect a set of interest rate spreads for the UK. Three types of inflation uncertainty—structural uncertainty, impulse uncertainty, and steady-state inflation uncertainty—are defined and derived by using a time-varying parameter model with a GARCH specification. It is found that both the structural and steady-state inflation uncertainties increase interest rate spreads, while the empirical evidence for the impulse uncertainty is not conclusive.