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Mortage interest rate dispersion in the euro area

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Author Info
Peter Hördahl () (Bank for International Settlements, Centralbahnplatz 2, CH-4002 Base, Switzerland.)
Oreste Tristani () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

This paper estimates the size and dynamics of inflation risk premia in the euro area, based on a joint model of macroeconomic and term structure dynamics. Information from both nominal and index-linked yields is used in the empirical analysis. Our results indicate that term premia in the euro area yield curve reflect predominantly real risks, i.e. risks which affect the returns on both nominal and index-linked bonds. On average, inflation risk premia were negligible during the EMU period but, occasionally, subject to statistically signifcant fluctuations in 2004-2006. Movements in the raw break-even rate appear to have mostly reflected such variations in inflation risk premia, while long-term inflation expectations have remained remarkably anchored from 1999 to date. JEL Classification: E43; E44.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 734.

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Length: 58 pages
Date of creation: Feb 2007
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Handle: RePEc:ecb:ecbwps:20070734

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Related research
Keywords: Term structure of interest rates; inflation risk premia; central bank credibility.;

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References listed on IDEAS
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