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Determinants of the inflation compensation curve in the euro area

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  • Jerome Coffinet
  • Sebastien Frappa

Abstract

In this study, we analyse the effect of macroeconomic surprises on inflation compensation data - the sum of inflation expectation, risk and liquidity premia - in the euro area. The empirical analysis is based on a daily data set, which covers a wide spectrum of maturities, stemming from inflation-indexed markets between 2 January 2004 and 31 December 2007. Our results suggest that when gauging short- and medium-term inflation compensations, market operators are sensitive to surprises related to real activity and prices. Notwithstanding, long-term inflation compensations remain generally unresponsive to macroeconomic surprises, attesting the European Central Bank's high credibility on the sample under consideration. The study also cross-checks the results from two different euro area inflation-indexed instruments (bonds and swaps) which differ slightly regarding medium-term horizon but give a similar picture regarding long-term horizons.

Suggested Citation

  • Jerome Coffinet & Sebastien Frappa, 2010. "Determinants of the inflation compensation curve in the euro area," The European Journal of Finance, Taylor & Francis Journals, vol. 16(8), pages 769-783.
    • Handle: RePEc:taf:eurjfi:v:16:y:2010:i:8:p:769-783
    DOI: 10.1080/1351847X.2010.481460
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    Cited by:

    1. Baranowski, Paweł & Doryń, Wirginia & Łyziak, Tomasz & Stanisławska, Ewa, 2021. "Words and deeds in managing expectations: Empirical evidence from an inflation targeting economy," Economic Modelling, Elsevier, vol. 95(C), pages 49-67.

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