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Inflation forecasts extracted from nominal and real yield curves

Author

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  • Geyer, Alois
  • Hanke, Michael
  • Weissensteiner, Alex

Abstract

The aim of this paper is to evaluate the performance of inflation forecasts backed out from the nominal and real yield curves in the United Kingdom. We use the Nelson–Siegel (NS) framework to model the break-even inflation term structure, and we base our analysis on the one-day break-even inflation derived from NS factors, which avoids the need for a direct estimation of the inflation risk premium. Fitting (vector) autoregression models augmented with nominal and/or real Cochrane-Piazzesi factors, we find that parsimonious models based on the one-day break-even inflation outperform other models in forecasting inflation out-of-sample. In addition, we quantify the parameter uncertainty and show that it may have considerable impact on inflation forecasts.

Suggested Citation

  • Geyer, Alois & Hanke, Michael & Weissensteiner, Alex, 2016. "Inflation forecasts extracted from nominal and real yield curves," The Quarterly Review of Economics and Finance, Elsevier, vol. 60(C), pages 180-188.
    • Handle: RePEc:eee:quaeco:v:60:y:2016:i:c:p:180-188
    DOI: 10.1016/j.qref.2015.10.002
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    Cited by:

    1. Lange, Ronald H., 2017. "The expected real yield and inflation components of the nominal yield curve," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 1-18.

    More about this item

    Keywords

    Inflation forecasts; Break-even inflation; Cochrane-Piazzesi factor; Nelson–Siegel model; Parameter uncertainty;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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