Because the new approaches to understanding inflation are grounded in the behavior of individual decisionmakers, they have the solid theoretical foundations that are valuable for policy analysis. 1 Moreover, some evidence indicates that empirical models based on this research do fairly well at forecasting. Of course, time will tell about their usefulness in the day-to-day operations of monetary policy.
This is because trading in financial markets removes persisting arbitrage opportunities across securities with similar risk characteristics and different maturities. As a consequence, returns are equalised across the term structure, except for premia that remunerate investors holding relatively longer term securities.