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Abstract

This paper estimates the size and dynamics of inflation risk premia in the euro area, based on a joint model of macroeconomic and term structure dynamics. Information from both nominal and index-linked yields is used in the empirical analysis. Our results indicate that term premia in the euro area yield curve reflect predominantly real risks, i.e. risks which affect the returns on both nominal and index-linked bonds. On average, inflation risk premia were negligible during the EMU period but occasionally subject to statistically signifcant fluctuations in 2004-2006. Movements in the raw break-even rate appear to have mostly reflected such variations in inflation risk premia, while long-term inflation expectations have remained remarkably anchored from 1999 to date.

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File URL: http://hdl.handle.net/10.1111/j.1542-4774.2012.01067.x
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Bibliographic Info

Article provided by European Economic Association in its journal Journal of the European Economic Association.

Volume (Year): 10 (2012)
Issue (Month): 3 (05)
Pages: 634-657

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Handle: RePEc:bla:jeurec:v:10:y:2012:i:3:p:634-657

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1. Hans Dewachter & Marco Lyrio, 2003. "Macro Factors and the Term Structure of Interest Rates," International Economics Working Papers Series ces0304, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
   
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   • Dewachter, H.D.R. & Lyrio, M., 2003. "Macro factors and the Term Structure of Interest Rates," Research Paper ERS-2003-037-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
   • Hans Dewachter, 2004. "Macro factors and the term structure of interest rates," Money Macro and Finance (MMF) Research Group Conference 2003 25, Money Macro and Finance Research Group.
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   • Dewachter, Hans & Lyrio, Marco, 2003. "Macro factors and the term structure of interest rates," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/238624, Katholieke Universiteit Leuven.
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   • Peter Hördahl & Oreste Tristani & David Vestin, 2004. "A joint econometric model of macroeconomic and term structure dynamics," Working Paper Series 405, European Central Bank.
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Cited by:

1. Ebru Yuksel & Kývýlcým Metin Ozcan & Ozan Hatipoglu, 2012. "A Survey on Time Varying Parameter Taylor Rule: A Model Modified with Interest Rate Pass Through," Working Papers 2012/08, Bogazici University, Department of Economics.
   
   • Yüksel, Ebru & Metin-Ozcan, Kivilcim & Hatipoglu, Ozan, 2013. "A survey on time-varying parameter Taylor rule: A model modified with interest rate pass-through," Economic Systems, Elsevier, vol. 37(1), pages 122-134.
2. Hisashi Nakamura & Keita Nakayama & Akihiko Takahashi, 2008. "Term Structure of Interest Rates Under Recursive Preferences in Continuous Time," Asia-Pacific Financial Markets, Springer, vol. 15(3), pages 273-305, December.
3. Kajuth, Florian & Watzka, Sebastian, 2011. "Inflation expectations from index-linked bonds: Correcting for liquidity and inflation risk premia," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 225-235, June.
   
   • Kajuth, Florian & Watzka, Sebastian, 2008. "Inflation expectations from index-linked bonds: Correcting for liquidity and inflation risk premia," Discussion Papers in Economics 4858, University of Munich, Department of Economics.
4. Juan Angel García & Thomas Werner, 2010. "Inflation risks and inflation risk premia," Working Paper Series 1162, European Central Bank.
5. Stefania D'Amico & Don H. Kim & Min Wei, 2010. "Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices," Finance and Economics Discussion Series 2010-19, Board of Governors of the Federal Reserve System (U.S.).
   
   • Stefania D'Amico & Don H. Kim & Min Wei, 2008. "Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices," Finance and Economics Discussion Series 2008-30, Board of Governors of the Federal Reserve System (U.S.).
   • Stefania D'Amico & Don H Kim & Min Wei, 2008. "Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices," BIS Working Papers 248, Bank for International Settlements.
6. Lemke, Wolfgang, 2008. "An affine macro-finance term structure model for the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 41-69, March.
   
   • Lemke, Wolfgang, 2007. "An affine macro-finance term structure model for the euro area," Discussion Paper Series 1: Economic Studies 2007,13, Deutsche Bundesbank, Research Centre.
7. David-Jan Jansen & Jakob de Haan, 2007. "The Importance of Being Vigilant: Has ECB Communication Influenced Euro Area Inflation Expectations?," DNB Working Papers 148, Netherlands Central Bank, Research Department.
   
   • Jakob de Haan & David-Jan Jansen, 2007. "The Importance of Being Vigilant: Has ECB Communication Influenced Euro Area Inflation Expectations?," CESifo Working Paper Series 2134, CESifo Group Munich.
8. Geert Bekaert & Xiaozheng Wang, 2010. "Inflation risk and the inflation risk premium," Economic Policy, CEPR & CES & MSH, vol. 25, pages 755-806, October.
9. Peter Hördahl & Oreste Tristani, 2010. "Inflation risk premia in the US and the euro area," BIS Working Papers 325, Bank for International Settlements.
   
   • Peter Hördahl & Oreste Tristani, 2010. "Inflation risk premia in the US and the euro area," Working Paper Series 1270, European Central Bank.
10. Philippe Mueller & Mikhail Chernov, 2008. "The Term Structure of Inflation Expectations," 2008 Meeting Papers 346, Society for Economic Dynamics.
    
    • Chernov, Mikhail & Mueller, Philippe, 2012. "The term structure of inflation expectations," Journal of Financial Economics, Elsevier, vol. 106(2), pages 367-394.
    • Chernov, Mikhail & Mueller, Philippe, 2008. "The Term Structure of Inflation Expectations," CEPR Discussion Papers 6809, C.E.P.R. Discussion Papers.
11. Ravenna , Federico & Seppälä, Juha, 2007. "Monetary policy, expected inflation and inflation risk premia," Research Discussion Papers 18/2007, Bank of Finland.
    
    • Juha Seppala & Federico Ravenna, 2007. "Monetary Policy, Expected Inflation, and Inflation Risk Premium," 2007 Meeting Papers 513, Society for Economic Dynamics.
12. Kaminska, Iryna & Meldrum, Andrew & Smith, James, 2011. "A global model of international yield curves: no-arbitrage term structure approach," Bank of England working papers 419, Bank of England.
13. Grishchenko, Olesya V., 2011. "Asset pricing in the production economy subject to monetary shocks," Journal of Economics and Business, Elsevier, vol. 63(3), pages 187-216, May.
14. Renne, J-P., 2009. "Frequency-domain analysis of debt service in a macro-finance model for the euro area," Working papers 261, Banque de France.
15. Tobias Adrian & Hao Wu, 2009. "The term structure of inflation expectations," Staff Reports 362, Federal Reserve Bank of New York.

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