Estimating Inflation Expectations with a Limited Number of Inflation-Indexed Bonds
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.
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- 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.
- Joyce, Michael & Lildholdt, Peter & Sorensen, Steffen, 2009. "Extracting inflation expectations and inflation risk premia from the term structure: a joint model of the UK nominal and real yield curves," Bank of England working papers 360, Bank of England.
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