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Option-implied probability distributions for future inflation

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  • Smith, Tom

    () (Bank of England)

Abstract

Beliefs about future inflation play a major role in determining the rate of inflation, and so it is important for the Monetary Policy Committee to take them into account when making their policy decisions. A number of measures of central expectations for inflation are available, such as surveys of inflation expectations or measures derived from financial markets. But until recently far fewer measures of beliefs about the full distribution of possible future inflation rates have been available. This article describes a new method for producing option-implied probability density functions for future inflation, which can be used as a measure of that distribution, and examines the recent rise in uncertainty about future inflation that they reveal.

Suggested Citation

  • Smith, Tom, 2012. "Option-implied probability distributions for future inflation," Bank of England Quarterly Bulletin, Bank of England, vol. 52(3), pages 224-234.
  • Handle: RePEc:boe:qbullt:0083
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    References listed on IDEAS

    as
    1. Nixon, Dan & Smith, Tom, 2012. "What can the oil futures curve tell us about the outlook for oil prices?," Bank of England Quarterly Bulletin, Bank of England, vol. 52(1), pages 39-47.
    2. Yuriy Kitsul & Jonathan H. Wright, 2012. "The Economics of Options-Implied Inflation Probability Density Functions," NBER Working Papers 18195, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Filippo Natoli & Laura Sigalotti, 2018. "Tail Co-movement in Inflation Expectations as an Indicator of Anchoring," International Journal of Central Banking, International Journal of Central Banking, vol. 14(1), pages 35-71, January.
    2. Maule, Becky & Pugh, Alice, 2012. "Do inflation expectations currently pose a risk to the economy?," Bank of England Quarterly Bulletin, Bank of England, vol. 53(1), pages 110-121.
    3. Scharnagl, Michael & Stapf, Jelena, 2015. "Inflation, deflation, and uncertainty: What drives euro-area option-implied inflation expectations, and are they still anchored in the sovereign debt crisis?," Economic Modelling, Elsevier, vol. 48(C), pages 248-269.
    4. Gabriele Galati & Zion Gorgi & Richhild Moessner & Chen Zhou, 2016. "Deflation risk in the euro area and central bank credibility," DNB Working Papers 509, Netherlands Central Bank, Research Department.
    5. Haberis, Alex & Masolo, Riccardo & Reinold, Kate, 2016. "Deflation probability and the scope for monetary loosening in the United Kingdom," Bank of England working papers 627, Bank of England.
    6. GuimarĂ£es , Rodrigo, 2012. "What accounts for the fall in UK ten-year government bond yields?," Bank of England Quarterly Bulletin, Bank of England, vol. 52(3), pages 213-223.
    7. Anderson, Gareth & Maule, Becky, 2014. "Assessing the risk to inflation from inflation expectations," Bank of England Quarterly Bulletin, Bank of England, vol. 54(2), pages 148-162.
    8. GuimarĂ£es, Rodrigo, 2014. "Expectations, risk premia and information spanning in dynamic term structure model estimation," Bank of England working papers 489, Bank of England.
    9. Markus K. Brunnermeier & Yuliy Sannikov, 2012. "Redistributive monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 331-384.
    10. Scharnagl, Michael & Stapf, Jelena, 2014. "Inflation, deflation, and uncertainty: What drives euro area option-implied inflation expectations and are they still anchored in the sovereign debt crisis?," Discussion Papers 24/2014, Deutsche Bundesbank.

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