Uncovering the U.S. Term Premium: An Alternative Route

The estimates of the U.S. term premium crucially depend upon the ex-ante decision on whether the short-term rate is either an I(0) or an I(1) process. In this paper we estimate a fractionally integrated (I(d)) model which simultaneously determines both the order of integration of the short-term rate and the associated term premium. We show that the term premium was essentially zero at the end of 2006, after having experienced a steady decline of around 2.5 percentage points since the beginning of 2004.