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Estimating inflation compensation for Turkey using yield curves

Author

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  • Duran, Murat
  • Gülşen, Eda

Abstract

Inflation compensation derived from nominal and real bond yields contains market based, real time information regarding the inflation expectations and the pricing of inflation risks. In this study, we calculate inflation compensation for Turkey by using nominal and real yield curves. The findings of event study analysis on inflation compensation indicate that changes in the term structure of inflation compensation contain information regarding the credibility of monetary authority. Moreover, we find that, at daily frequency, liquidity conditions have no significant effect on inflation compensation and hence the effects of events such as monetary policy decisions and inflation surprises on inflation compensation can be attributed mainly to changes in inflation expectations and pricing of inflation uncertainty.

Suggested Citation

  • Duran, Murat & Gülşen, Eda, 2013. "Estimating inflation compensation for Turkey using yield curves," Economic Modelling, Elsevier, vol. 32(C), pages 592-601.
  • Handle: RePEc:eee:ecmode:v:32:y:2013:i:c:p:592-601
    DOI: 10.1016/j.econmod.2013.02.036
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    References listed on IDEAS

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    1. Pu Shen, 2006. "Liquidity risk premia and breakeven inflation rates," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 29-54.
    2. Stefania D'Amico & Don H Kim & Min Wei, 2008. "Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices," BIS Working Papers 248, Bank for International Settlements.
    3. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," NBER Chapters,in: NBER Macroeconomics Annual 2003, Volume 18, pages 209-270 National Bureau of Economic Research, Inc.
    4. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
    5. Rose Cunningham & Brigitte Desroches & Eric Santor, 2010. "Inflation Expectations and the Conduct of Monetary Policy: A Review of Recent Evidence and Experience," Bank of Canada Review, Bank of Canada, vol. 2010(Spring), pages 13-25.
    6. Jochmann, Markus & Koop, Gary & Potter, Simon M., 2010. "Modeling the dynamics of inflation compensation," Journal of Empirical Finance, Elsevier, vol. 17(1), pages 157-167, January.
    7. Bank for International Settlements, 2005. "Zero-coupon yield curves: technical documentation," BIS Papers, Bank for International Settlements, number 25, December.
    8. Refet S. Gürkaynak & Brian Sack & Jonathan H. Wright, 2010. "The TIPS Yield Curve and Inflation Compensation," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 70-92, January.
    9. Özge AKINCI & Burcu GÜRCİHAN & Refet GÜRKAYNAK & Özgür ÖZEL, 2007. "Devlet iç borçlanma senetleri için getiri eğrisi tahmini," Iktisat Isletme ve Finans, Bilgesel Yayincilik, vol. 22(252), pages 5-25.
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    Cited by:

    1. Murat Duran & Eda Gulsen & Orhun Sevinc, 2013. "Cesitli Enflasyon Beklentisi Olcutleri Kullanilarak Genel Bir Enflasyon Beklentisi Gostergesi Elde Edilmesi," CBT Research Notes in Economics 1313, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

    More about this item

    Keywords

    Inflation compensation; Real yield; Event study;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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