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The TIPS yield curve and inflation compensation

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Author Info
Refet S. Gürkaynak
Brian Sack
Jonathan H. Wright

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Abstract

For over ten years, the U.S. Treasury has issued index-linked debt. Federal Reserve Board staff have fitted a yield curve to these indexed securities at the daily frequency from the start of 1999 to the present. This paper describes the methodology that is used and makes the estimates public. Comparison with the corresponding nominal yield curve allows measures of inflation compensation (or breakeven inflation rates) to be computed. We discuss the interpretation of inflation compensation and its relationship to inflation expectations and uncertainty, offering some empirical evidence that these measures are affected by an inflation risk premium that varies considerably at high frequency. In addition, we also find evidence that inflation compensation was held down in the early years of the sample by a premium associated with the illiquidity of TIPS at the time. We hope that the TIPS yield curve and inflation compensation data, which are posted here and will be updated periodically, will provide a useful tool to applied economists.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-05.

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Date of creation: 2008
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Handle: RePEc:fip:fedgfe:2008-05

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Related research
Keywords: Government securities ; Inflation-indexed bonds ; Inflation (Finance);

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. David K. Backus & Jonathan H. Wright, 2007. "Cracking the Conundrum," Working Papers 07-22, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
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  2. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June. [Downloadable!] (restricted)
  3. 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!]
  4. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, 02. [Downloadable!] (restricted)
  5. Don H. Kim & Jonathan H. Wright, 2005. "An arbitrage-free three-factor term structure model and the recent behavior of long-term yields and distant-horizon forward rates," Finance and Economics Discussion Series 2005-33, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  6. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(1), pages 41-66. [Downloadable!] (restricted)
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  7. Ball, Laurence, 1992. "Why does high inflation raise inflation uncertainty?," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 371-388, June. [Downloadable!] (restricted)
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  8. Robert R. Bliss, 1996. "Testing term structure estimation methods," Working Paper 96-12, Federal Reserve Bank of Atlanta. [Downloadable!]
  9. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October. [Downloadable!] (restricted)
  10. Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1163-1212, May. [Downloadable!] (restricted)
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(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. Jens Christensen, 2008. "Treasury bond yields and long-run inflation expectations," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Aug 15. [Downloadable!]
  2. Joseph G. Haubrich & George Pennacchi & Peter Ritchken, 2008. "Estimating real and nominal term structures using treasury yields, inflation, inflation forecasts, and inflation swap rates," Working Paper 0810, Federal Reserve Bank of Cleveland. [Downloadable!]
  3. Coffinet, J. & Frappa, S., 2008. "Macroeconomic Surprises and the Inflation Compensation Curve in the Euro Area," Documents de Travail 220, Banque de France. [Downloadable!]
  4. Jennifer E. Roush, 2008. "The "growing pains" of TIPS issuance," Finance and Economics Discussion Series 2008-08, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2008. "Inflation expectations and risk premiums in an arbitrage-free model of nominal and real bond yields," Working Paper Series 2008-34, Federal Reserve Bank of San Francisco. [Downloadable!]
  6. John Y. Campbell & Robert J. Shiller & Luis M. Viceira, 2009. "Understanding Inflation-Indexed Bond Markets," NBER Working Papers 15014, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Todd E. Clark & Troy Davig, 2008. "An empirical assessment of the relationships among inflation and short- and long-term expectations," Research Working Paper RWP 08-05, Federal Reserve Bank of Kansas City. [Downloadable!]
  8. Stefania D'Amico & Don H. Kim & Min Wei, 2008. "Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices," Finance and Economics Discussion Series 2008-30, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. Tobias Adrian & Hao Wu, 2009. "The term structure of inflation expectations," Staff Reports 362, Federal Reserve Bank of New York. [Downloadable!]
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