The Term Structure of Inflation Expectations

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe present estimates of the term structure of inflation expectations, derived from an affine model of real and nominal yield curves. The model features stochastic covariation of inflation with the real pricing kernel, enabling us to extract a time-varying inflation risk premium. We fit the model not only to yields, but also to the yields' variancecovariance matrix, thus increasing identification power. We find that model-implied inflation expectations can differ substantially from break-even inflation rates when market volatility is high. Our model's ability to be updated weekly makes it suitable for real-time monetary policy analysis.

Estimating the New Keynesian Phillips Curve for the UK: evidence from the inflation-indexed bonds market

“…During financial crisis when market volatility is high, the model-implied inflation expectations differ substantially from both the actual and break-even inflation rates. This is consistent with Adrian and Wu (2009). This is particularly true for modelimplied inflation expectations from the 10-year rates.…”

The Yield Curve and Financial Risk Premia

“…The problem is that specific numerical values of the underlying parameters give rise to the same term structure. See for instance,Dai and Singleton (2002),Duffee (2002),Dai and Philippon (2005),Kim and Orphanides (2005),Kim and Wright (2005),Lemke (2006), Bolder (2006,), D'Amico et al (2008b), Pericoli and Taboga (2008 andAdrian and Wu (2009). show that if one restricts a specific set of parameters, this allows to treat the more "interesting" parameters to the econometrician as free parameters.…”

Estimating Inflation Risk Premia Using Inflation‐linked Bonds: A Review

“…The indexation lag, another ‘feature’ of ILB, has shown to be less relevant: Grishchenko and Huang () take explicitly the three‐month indexation lag into account and derive an indexation lag premium which ranges between 0.03 basis points (one‐year maturity) and 4.2 basis points (10‐year maturity). Adrian and Wu () also control for the indexation lag and find no considerable differences. Thus, carry adjustment of yields due to the indexation lag is not very relevant.…”

“…The inflation risk premium is then derived by the difference between the (observed) break‐even inflation rate and the model‐implied estimates for the expected inflation. The inflation risk premium for bonds with a maturity of 10 years varies between 0 and 100 basis points during 2003–2008 and rises sharply during the financial crisis, up to 170 basis points (Adrian and Wu, , figure 5). As in Chen et al .…”