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TIPS liquidity, breakeven inflation, and inflation expectations

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  • Jens Christensen
  • James Gillan

Abstract

Estimating market expectations for inflation from the yield difference between nominal Treasury bonds and Treasury inflation-protected securities-a difference known as breakeven inflation-is complicated by the liquidity differential between these two types of securities. Currently, the extent to which liquidity plays a role in determining breakeven inflation remains contentious. Information from the market for inflation swaps provides a range for the possible liquidity premium in TIPS, which in turn suggests a range for estimates of inflation expectations that is well below the widely followed Survey of Professional Forecasters inflation forecast.

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File URL: http://www.frbsf.org/publications/economics/letter/2011/el2011-19.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal FRBSF Economic Letter.

Volume (Year): (2011)
Issue (Month): june20 ()
Pages:

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Handle: RePEc:fip:fedfel:y:2011:i:june20:n:2011-19

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Keywords: Inflation (Finance) ; Inflation-indexed bonds;

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  1. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2010. "Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 143-178, 09.
  2. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2011. "Extracting deflation probability forecasts from Treasury yields," Working Paper Series 2011-10, Federal Reserve Bank of San Francisco.
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