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The term structure of inflation expectations

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Author Info

  • Tobias Adrian
  • Hao Wu

Abstract

We present estimates of the term structure of inflation expectations, derived from an affine model of real and nominal yield curves. The model features stochastic covariation of inflation with the real pricing kernel, enabling us to extract a time-varying inflation risk premium. We fit the model not only to yields, but also to the yields' variance-covariance matrix, thus increasing identification power. We find that model-implied inflation expectations can differ substantially from break-even inflation rates when market volatility is high. Our model's ability to be updated weekly makes it suitable for real-time monetary policy analysis.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 362.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:362

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Related research

Keywords: Inflation risk ; Asset pricing ; Financial markets ; Stochastic analysis;

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Citations

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Cited by:
  1. Glenn D. Rudebusch, 2010. "Macro-finance models of interest rates and the economy," Working Paper Series 2010-01, Federal Reserve Bank of San Francisco.
  2. Luis Fernando Melo Velandia & José Fernando Moreno Gutiérrez, 2010. "Actualización de la descomposición del BEI cuando se dispone de nueva información," BORRADORES DE ECONOMIA 007333, BANCO DE LA REPÚBLICA.
  3. Jens H.E. Christensen & James M. Gillan, 2011. "A model-independent maximum range for the liquidity correction of TIPS yields," Working Paper Series 2011-16, Federal Reserve Bank of San Francisco.
  4. Jens H.E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2012. "Extracting Deflation Probability Forecasts from Treasury Yields," International Journal of Central Banking, International Journal of Central Banking, vol. 8(4), pages 21-60, December.
  5. Philippe Mueller & Mikhail Chernov, 2008. "The Term Structure of Inflation Expectations," 2008 Meeting Papers 346, Society for Economic Dynamics.
  6. 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.
  7. Felix Geiger, 2009. "International Interest-Rate Risk Premia in Affine Term Structure Models," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 316/2009, Department of Economics, University of Hohenheim, Germany.
  8. Matthias Fleckenstein & Francis A. Longstaff & Hanno Lustig, 2010. "Why Does the Treasury Issue Tips? The Tips–Treasury Bond Puzzle," NBER Working Papers 16358, National Bureau of Economic Research, Inc.

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