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The term structure of inflation risk premia and macroeconomic dynamics

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  • Peter Hördahl

    ()
    (European Central Bank)

  • Oreste Tristani

    (European Central Bank)

  • David Vestin

    (European Central Bank)

Abstract

This paper estimates the size and dynamics of inflation risk premia in the euro area using information from nominal and index-linked yields. Our main result is that the inflation risk premium on long-term nominal yields is nonnegligible from an economic viewpoint. Break-even inflation rates — i.e. the difference between nominal and real yields with identical maturity — therefore represent a relatively crude approximation of inflation expectations. Break-even inflation rates are also found to contain useful information to forecast inflation and output growth, even when taking into account standard indicators such as the slope of the yield curve

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File URL: http://repec.org/sce2006/up.7189.1140616031.pdf
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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 203.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:203

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Keywords: Term structure of interest rates; risk premia; policy rules;

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References

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Cited by:
  1. Coffinet, J. & Frappa, S., 2008. "Macroeconomic Surprises and the Inflation Compensation Curve in the Euro Area," Working papers 220, Banque de France.

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