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Estimating Inflation Expectations with a Limited Number of Inflation-Indexed Bonds

Author

Listed:
  • Richard Finlay

    (Reserve Bank of Australia)

  • Sebastian Wende

    (Reserve Bank of Australia)

Abstract

We develop a novel technique to estimate inflation expectations and inflation risk premia when only a limited number of inflation-indexed bonds are available. The method involves pricing coupon-bearing inflation-indexed bonds directly in terms of an affine term structure model, and avoids the usual requirement of estimating zero-coupon real yield curves. We estimate the model using a non-linear Kalman filter and apply it to Australia. The results suggest that long-term inflation expectations in Australia are well anchored within the Reserve Bank of Australia’s inflation target range of 2 to 3 percent, and that inflation expectations are less volatile than inflation risk premia.

Suggested Citation

  • Richard Finlay & Sebastian Wende, 2012. "Estimating Inflation Expectations with a Limited Number of Inflation-Indexed Bonds," International Journal of Central Banking, International Journal of Central Banking, vol. 8(2), pages 111-142, June.
  • Handle: RePEc:ijc:ijcjou:y:2012:q:2:a:4
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    References listed on IDEAS

    as
    1. Joyce, Michael A.S. & Lildholdt, Peter & Sorensen, Steffen, 2010. "Extracting inflation expectations and inflation risk premia from the term structure: A joint model of the UK nominal and real yield curves," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 281-294, February.
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    Cited by:

    1. Camba-Méndez, Gonzalo & Werner, Thomas, 2017. "The inflation risk premium in the post-Lehman period," Working Paper Series 2033, European Central Bank.
    2. Jonathan Hambur & Richard Finlay, 2018. "Affine Endeavour: Estimating a Joint Model of the Nominal and Real Term Structures of Interest Rates in Australia," RBA Research Discussion Papers rdp2018-02, Reserve Bank of Australia.
    3. David Norman & Anthony Richards, 2012. "The Forecasting Performance of Single Equation Models of Inflation," The Economic Record, The Economic Society of Australia, vol. 88(280), pages 64-78, March.
    4. Will Devlin & Deepika Patwardhan, 2012. "Measuring market inflation expectations," Economic Roundup, The Treasury, Australian Government, issue 2, pages 5-17, August.
    5. Tahlee Stone, 2016. "The Sensitivity of Personal Income to GDP Growth," RBA Bulletin, Reserve Bank of Australia, pages 1-9, December.
    6. Tosapol Apaitan, 2015. "Extracting Market Inflation Expectations: A Semi-structural Macro-finance Term Structure Model," PIER Discussion Papers 4., Puey Ungphakorn Institute for Economic Research, revised Sep 2015.
    7. Angus Moore, 2016. "Measures of Inflation Expectations in Australia," RBA Bulletin, Reserve Bank of Australia, pages 23-31, December.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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