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Real Return Bonds: Monetary Policy Credibility and Short-Term Inflation Forecasting




The break-even inflation rate (BEIR) is calculated by comparing the yields on conventional and Real Return Bonds. Defined as the average rate of inflation that equates the expected returns on these two bonds, the BEIR has the potential to contain useful information about long-run inflation expectations. Yet the BEIR has been higher, on average, and more variable than survey measures of inflation expectations, which may be explained by the effects of premiums and distortions embedded in the BEIR. Because of the difficulty in accounting for these distortions, the BEIR should not be given a large weight as a measure of long-run inflation expectations at this time. However, as the Real Return Bond market continues to develop, the BEIR should become a more useful indicator of inflation expectations. At present, it demonstrates no clear advantage over survey measures and even past inflation rates in forecasting near-term inflation.

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  • Christopher Reid & Frédéric Dion & Ian Christensen, 2004. "Real Return Bonds: Monetary Policy Credibility and Short-Term Inflation Forecasting," Bank of Canada Review, Bank of Canada, vol. 2004(Autumn), pages 15-26.
  • Handle: RePEc:bca:bcarev:v:2004:y:2004:i:autumn04:p:15-26

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    References listed on IDEAS

    1. Thom, Rodney & Walsh, Brendan, 2002. "The effect of a currency union on trade: Lessons from the Irish experience," European Economic Review, Elsevier, vol. 46(6), pages 1111-1123, June.
    2. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
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    Cited by:

    1. Christensen, Ian & Frédéric Dion & Christopher Reid, 2004. "Real Return Bonds, Inflation Expectations, and the Break-Even Inflation Rate," Staff Working Papers 04-43, Bank of Canada.
    2. Bank for International Settlements, 2007. "Institutional investors, global savings and asset allocation," CGFS Papers, Bank for International Settlements, number 27.

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