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Deriving inflation expectations from nominal and inflation-indexed Treasury yields

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Author Info
Brian Sack
Abstract

This paper derives a measure of inflation compensation from the yields of a Treasury inflation-indexed security and a portfolio of STRIPS that has similar liquidity and duration as the indexed security. This measure can be used as a proxy for inflation expectations if the inflation risk premium is small. The calculated measure suggests that the rate of inflation expected over the next ten years fell from just under 3% in mid-1997 to just under 1 3/4% by early 1999, before rising back to about 2 1/2% by the beginning of 2000. This variation is more extensive than would have been expected from a simple model of inflation dynamics or from a survey measure of long-run inflation expectations.

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Publisher Info
Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-33.

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Date of creation: 2000
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Handle: RePEc:fip:fedgfe:2000-33

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Related research
Keywords: Government securities ; Treasury notes ; Inflation (Finance);

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
    Other versions:
  2. Brian Sack, 2000. "Using Treasury STRIPS to measure the yield curve," Finance and Economics Discussion Series 2000-42, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
    Other versions:
  4. Dominique Dupont & Brian Sack, 1999. "The Treasury securities market: overview and recent development," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 785-806. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Daniel L. Thornton, 2007. "The lower and upper bounds of the Federal Open Market Committee's long-run inflation objective," Review, Federal Reserve Bank of St. Louis, issue May, pages 183-194. [Downloadable!]
  2. William R. Emmons & Frank A. Schmid, 2004. "Monetary policy actions and the incentive to invest," Supervisory Policy Analysis Working Papers 2004-03, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  3. Brian Sack & Robert Elsasser, 2002. "Treasury inflation-indexed debt: a review of the U.S. experience," Finance and Economics Discussion Series 2002-32, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Peter S. Spiro, 2003. "Evidence on inflation expectations from Canadian real return bonds," Macroeconomics 0312004, EconWPA. [Downloadable!]
  5. Francisco Alonso & Roberto Blanco & Ana del Río, 2001. "Estimating Inflation Expectations using French Government Inflation-Indexed Bonds," Banco de España Working Papers 0111, Banco de España. [Downloadable!]
  6. 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!]
  7. William R. Emmons, 2000. "The information content of Treasury inflation-indexed securities," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 25-38. [Downloadable!]
  8. Dong Fu, 2007. "Inflation expectations, real interest rate and risk premiums -- evidence from bond market and consumer survey data," Working Papers 0705, Federal Reserve Bank of Dallas. [Downloadable!]
  9. Christensen, Ian & Frédéric Dion & Christopher Reid, 2004. "Real Return Bonds, Inflation Expectations, and the Break-Even Inflation Rate," Working Papers 04-43, Bank of Canada. [Downloadable!]
  10. Brian Sack & Robert Elsasser, 2004. "Treasury inflation-indexed debt: a review of the U.S. experience," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 47-63. [Downloadable!]
  11. Menzie Chinn & Jeffrey Frankel, 2003. "The Euro Area and World Interest Rates," Santa Cruz Center for International Economics, Working Paper Series 1016, Center for International Economics, UC Santa Cruz. [Downloadable!]
    Other versions:
  12. Kosuke Aoki & Takeshi Kimura, 2008. "Central Banks Two-Way Communication with the Public and Inflation Dynamics," CEP Discussion Papers dp0899, Centre for Economic Performance, LSE. [Downloadable!]
  13. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a central bank perspective," Banco de España Occasional Papers 0705, Banco de España. [Downloadable!]
    Other versions:
  14. Quentin Chu & Deborah Pittman & Linda Yu, 2005. "Information Risk in TIPS Market: An Analysis of Nominal and Real Interest Rates," Review of Quantitative Finance and Accounting, Springer, vol. 24(3), pages 235-250, May. [Downloadable!] (restricted)
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