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The term structure of inflation expectations

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  • Chernov, Mikhail
  • Mueller, Philippe

Abstract

We use information in the term structure of survey-based forecasts of inflation to estimate a factor hidden in the nominal yield curve. We construct a model that accommodates forecasts over multiple horizons from multiple surveys and Treasury real and nominal yields by allowing for differences between risk-neutral, subjective, and objective probability measures. We establish that model-based inflation expectations are driven by inflation, output, and one latent factor. We find that this factor affects inflation expectations at all horizons but has almost no effect on the nominal yields; that is, the latent factor is hidden. We show that this hidden factor is not related to either current and past inflation or the standard set of macro variables studied in the literature. Consistent with the theoretical property of a hidden factor, our model outperforms a standard macro-finance model in its forecasting of inflation and yields.

Suggested Citation

  • Chernov, Mikhail & Mueller, Philippe, 2012. "The term structure of inflation expectations," Journal of Financial Economics, Elsevier, vol. 106(2), pages 367-394.
    • Handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:367-394
    DOI: 10.1016/j.jfineco.2012.06.004
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    More about this item

    Keywords

    Affine term structure models; Macro factors; Hidden factors; Survey forecasts;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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