What drives euro area break-even inflation rates?

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What drives euro area break-even inflation rates?

Author Info

Matteo Ciccarelli () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Juan Angel García () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Matteo Ciccarelli

Abstract

The yield spread between nominal and inflation-linked bonds (or break-even inflation rates, BEIR) is a fundamental indicator of inflation expectations (and associated premia). This paper investigates which macroeconomic and financial variables explain BEIRs. We evaluate a large number of potential explanatory variables through Bayesian model selection techniques and document their explanatory power at different horizons. At short horizons, actual inflation dynamics is the main determinant of BEIRs. At long horizons, financial variables (i.e. term spread, bond market volatility) become increasingly relevant, but confidence and cyclical indicators remain important. JEL Classification: C11, C52, E31.

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Paper provided by European Central Bank in its series Working Paper Series with number 996.

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Length: 38 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:ecb:ecbwps:20090996

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This paper has been announced in the following NEP Reports:

NEP-ALL-2009-02-07 (All new papers)
NEP-CBA-2009-02-07 (Central Banking)
NEP-EEC-2009-02-07 (European Economics)
NEP-MAC-2009-02-07 (Macroeconomics)
NEP-MON-2009-02-07 (Monetary Economics)

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Andrew Ang & Geert Bekaert & Min Wei, 2007. "The Term Structure of Real Rates and Expected Inflation," NBER Working Papers 12930, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
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Jacob Ejsing & Juan Angel García & Thomas Werner, 2007. "The term structure of euro area break-even inflation rates - the impact of seasonality," Working Paper Series 830, European Central Bank. [Downloadable!]
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Other versions:
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