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Inflation Risk Premia In The Term Structure Of Interest Rates

Listed author(s):
  • Peter Hördahl
  • Oreste Tristani

This paper estimates the size and dynamics of inflation risk premia in the euro area, based on a joint model of macroeconomic and term structure dynamics. Information from both nominal and index-linked yields is used in the empirical analysis. Our results indicate that term premia in the euro area yield curve reflect pre-dominantly real risks, i.e. risks which affect the returns on both nominal and index-linked bonds. On average, inflation risk premia were negligible during the EMU period but, occasionally, subject to statistically significant fluctuations in 2004-2006. Movements in the raw break-even rate appear to have mostly reflected such variations in inflation risk premia, while long-term inflation expectations have remained remarkably anchored from 1999 to date. JEL Classification: E43, E44

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File URL: http://hdl.handle.net/10.1111/j.1542-4774.2012.01067.x
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Article provided by European Economic Association in its journal Journal of the European Economic Association.

Volume (Year): 10 (2012)
Issue (Month): 3 (05)
Pages: 634-657

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Handle: RePEc:bla:jeurec:v:10:y:2012:i:3:p:634-657
DOI: j.1542-4774.2012.01067.x
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