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Deriving Estimates of Inflation Expectations from the Prices of UK Government Bonds

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  • Mark Deacon
  • Andrew Derry
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    Abstract

    Bonds with payments linked to the Retail Price Index were first issued in the United Kingdom in 1981 and now account for a significant proportion of the total UK government bond market. This paper discusses various methods by which prices of these indexed bonds can be compared with prices of conventional bonds to infer market expectations of future inflation, and in particular outlines the approach currently used to produce the inflation term structure published in the Bank of England's Inflation Report. There are a number of estimation difficulties - both theoretical and practical - in deriving such term structures and therefore a number of caveats that should be borne in mind when interpreting such measures of expectations.

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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1994/wp23.pdf
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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 23.

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    Date of creation: Jul 1994
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    Handle: RePEc:boe:boeewp:23

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    Cited by:
    1. Seppala, Juha, 2004. "The term structure of real interest rates: theory and evidence from UK index-linked bonds," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1509-1549, October.
    2. Kanas, Angelos, 2014. "Bond futures, inflation-indexed bonds, and inflation risk premium," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 82-99.
    3. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
    4. Andreas Reschreiter, 2010. "Indexed bonds and revisions of inflation expectations," Annals of Finance, Springer, vol. 6(4), pages 537-554, October.
    5. Gerardo M Licandro, 2001. "Monetary Policy Coordination, Monetary Integration and other essays," Levine's Working Paper Archive 625018000000000172, David K. Levine.
    6. Matías Bernier B & Felipe Alarcón G. ., 2009. "Diferencias en Medidas de Compensación Inflacionaria y Swap Spread," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 12(1), pages 105-116, April.
    7. Clark, Ephraim & Lakshmi, Geeta, 2004. "Sovereign debt and the cost of migration: India 1990-1992," Journal of Asian Economics, Elsevier, vol. 15(1), pages 111-134, February.

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