Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/339249 
Year of Publication: 
2026
Series/Report no.: 
WIDER Working Paper No. 21/26
Publisher: 
The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki
Abstract: 
Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond-specific liquidity risk premia, this paper provides estimates of bond investors' inflation expectations and associated inflation risk premia in South African sovereign bonds. The results suggest that investors' long-term inflation expectations have gradually been declining towards the tolerance band adopted by the South African Reserve Bank in 2000. Although volatile, the estimated inflation risk premia have declined significantly since 2021, while a market-based estimate of the natural real rate has remained stable and slightly negative. A related measure of the stance of monetary policy is currently assessed to be mildly restrictive. Leveraging the estimated model's rich dynamics to assess the outlook for these key variables suggests that expected inflation is likely to gradually fall further, while monetary policy is projected to ease towards neutral in the context of a stable natural real rate.
Subjects: 
term structure modelling
inflation risk
liquidity risk
financial market frictions
emerging bond market
JEL: 
C32
E43
E52
E58
F41
F42
G12
Persistent Identifier of the first edition: 
ISBN: 
978-92-9267-697-1
Document Type: 
Working Paper

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