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Disagreement about inflation and the yield curve

Author

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  • Ehling, Paul
  • Gallmeyer, Michael
  • Heyerdahl-Larsen, Christian
  • Illeditsch, Philipp

Abstract

We show that inflation disagreement, not just expected inflation, has an impact on nominal interest rates. In contrast to expected inflation, which mainly affects the wedge between real and nominal yields, inflation disagreement affects nominal yields predominantly through its impact on the real side of the economy. We show theoretically and empirically that inflation disagreement raises real and nominal yields and their volatilities. Inflation disagreement is positively related to consumers’ cross-sectional consumption growth volatility and trading in fixed income securities. Calibrating our model to disagreement, inflation, and yields reproduces the economically significant impact of inflation disagreement on yield curves.

Suggested Citation

  • Ehling, Paul & Gallmeyer, Michael & Heyerdahl-Larsen, Christian & Illeditsch, Philipp, 2018. "Disagreement about inflation and the yield curve," Journal of Financial Economics, Elsevier, vol. 127(3), pages 459-484.
    • Handle: RePEc:eee:jfinec:v:127:y:2018:i:3:p:459-484
    DOI: 10.1016/j.jfineco.2018.01.001
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    More about this item

    Keywords

    Inflation disagreement; Real and nominal yields; Yield volatilities; Cross-sectional consumption growth volatility; Speculative trade;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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