*Review of Finance, 2014.*

With Bruno Feunou. Previous versions circulated as *Forecasting Inflation and the Inflation Risk Premium.*

Standard Gaussian macro-finance term structure models impose that the conditional mean is a function of the risk factors. We relax this assumption: yields are linear in the conditional mean (but not in the risk factors). To illustrate, if inflation is one of the factors, then yields should span expected inflation but not inflation. Second, expected and surprise yield changes can have opposite contemporaneous effects on expected inflation. Third, the inflation survey forecasts and the inflation rate can be used consistently within the state equation. These three features are inconsistent with the Markov assumption. Our results hold for the US and for Canada. The paper is here.