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Estimating Inflation Expectations with a Limited Number of Inflation-Indexed Bonds

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  • Richard Finlay

    (Reserve Bank of Australia)

  • Sebastian Wende

    (Reserve Bank of Australia)

Abstract

We develop a novel technique to estimate inflation expectations and inflation risk premia when only a limited number of inflation-indexed bonds are available. The method involves pricing coupon-bearing inflation-indexed bonds directly in terms of an affine term structure model, and avoids the usual requirement of estimating zero-coupon real yield curves. We estimate the model using a non-linear Kalman filter and apply it to Australia. The results suggest that long-term inflation expectations in Australia are well anchored within the Reserve Bank of Australia’s inflation target range of 2 to 3 percent, and that inflation expectations are less volatile than inflation risk premia.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 8 (2012)
Issue (Month): 2 (June)
Pages: 111-142

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Handle: RePEc:ijc:ijcjou:y:2012:q:2:a:4

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  1. Joyce, Michael & Lildholdt, Peter & Sorensen, Steffen, 2009. "Extracting inflation expectations and inflation risk premia from the term structure: a joint model of the UK nominal and real yield curves," Bank of England working papers 360, Bank of England.
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Cited by:
  1. Will Devlin & Deepika Patwardhan, 2012. "Measuring market inflation expectations," Economic Roundup, Treasury, Australian Government, issue 2, pages 5-17, August.
  2. David Norman & Anthony Richards, 2012. "The Forecasting Performance of Single Equation Models of Inflation," The Economic Record, The Economic Society of Australia, vol. 88(280), pages 64-78, 03.

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