Central Bank of Iceland paper highlights limitations of inflation indexed bonds
Inflation index-linked bonds are a poor indicator of the real interest rates as they do not capture changes in the risk premia of holding the paper, according to a Central Bank of Iceland paper, published on January 27.
Francis Breedon, the paper's author, undertakes a variance decomposition of index-linked bond returns for the US, UK and Iceland. Breedon says that while in principle, inflation indexed bonds are meant to be among the most reliable source of such real interest rates, since their
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