Real Return Bonds, Inflation Expectations, and the Break-Even Inflation Rate
According to the Fisher hypothesis, the gap between Canadian nominal and Real Return Bond yields (or break-even inflation rate) should be a good measure of inflation expectations. The authors find that this measure was higher, on average, and more variable than survey measures of inflation expectations between 1992 and 2003. They examine whether risk premiums and distortions embedded in this interest rate gap can account for these facts. Their results indicate that distortions were likely an important reason for the high level and variation of this measure over much of the 1990s. There is little evidence that the distortions examined were as important between 2000 and 2003, but the high level of the break-even inflation rate in 2004 may be evidence of their return. Given the potential distortions, and the difficulty in identifying them, the authors conclude that it is premature to consider this measure a reliable gauge of monetary policy credibility. In addition, it is not as useful as competing tools for short- and medium-term inflation forecasting.
|Date of creation:||2004|
|Contact details of provider:|| Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada|
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Giordani, Paolo & Soderlind, Paul, 2003.
"Inflation forecast uncertainty,"
European Economic Review,
Elsevier, vol. 47(6), pages 1037-1059, December.
- Giordani, Paolo & Soderlind, Paul, 2000. "Inflation Forecast Uncertainty," SSE/EFI Working Paper Series in Economics and Finance 384, Stockholm School of Economics, revised 09 Oct 2000.
- Söderlind, Paul, 2000. "Inflation Forecast Uncertainty," CEPR Discussion Papers 2499, C.E.P.R. Discussion Papers.
- Joseph G. Haubrich & Ann M. Dombrosky, 1992. "Gilt by association: uncovering expected inflation," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jun.
- Martin D. D. Evans, 1998. "Real Rates, Expected Inflation, and Inflation Risk Premia," Journal of Finance, American Finance Association, vol. 53(1), pages 187-218, 02.
- David Barr & John Campbell, "undated". "Inflation, real interest rates and the bond market: a study of UK nominal and index-linked Government bond prices," CERF Discussion Paper Series 95-09, Economics and Finance Section, School of Social Sciences, Brunel University.
- David G. Barr & John Y. Campbell, 1996. "Inflation, Real Interest Rates, and the Bond Market: A Study of UK Nominal and Index-Linked Government Bond Prices," NBER Working Papers 5821, National Bureau of Economic Research, Inc.
- Barr, David & Campbell, John, 1997. "Inflation, Real Interest Rates, and the Bond Market: A Study of UK Nominal and Index-Linked Government Bond Prices," Scholarly Articles 3163261, Harvard University Department of Economics.
- John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Data," Harvard Institute of Economic Research Working Papers 1758, Harvard - Institute of Economic Research.
- Thomas Mayer, 1998. "Indexed Bonds And Heterogeneous Agents," Contemporary Economic Policy, Western Economic Association International, vol. 16(1), pages 77-84, 01.
- Mayer, T., 1993. "Indexed Bonds and Heterogenous Agents," Papers 93-07, California Davis - Institute of Governmental Affairs.
- Crawford, A & Kasumovich, M, 1996. "Does Inflation Uncertainty Vary with the Level of Inflation?," Staff Working Papers 96-09, Bank of Canada.
- Frédérick Demers, 2003. "The Canadian Phillips Curve and Regime Shifting," Staff Working Papers 03-32, Bank of Canada.
- Christopher Reid & Frédéric Dion & Ian Christensen, 2004. "Real Return Bonds: Monetary Policy Credibility and Short-Term Inflation Forecasting," Bank of Canada Review, Bank of Canada, vol. 2004(Autumn), pages 15-26.
- Brian P. Sack & Robert Elsasser, 2004. "Treasury inflation-indexed debt: a review of the U.S. experience," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 47-63.
- Brian P. Sack, 2000. "Deriving inflation expectations from nominal and inflation-indexed Treasury yields," Finance and Economics Discussion Series 2000-33, Board of Governors of the Federal Reserve System (U.S.).
- Refet S. Gürkaynak & Brian P. Sack & Eric T. Swanson, 2003. "The excess sensitivity of long-term interest rates: evidence and implications for macroeconomic models," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
- Refet S. Gürkaynak & Brian P. Sack & Eric T. Swanson, 2003. "The excess sensitivity of long-term interest rates: evidence and implications for macroeconomic models," Finance and Economics Discussion Series 2003-50, Board of Governors of the Federal Reserve System (U.S.).
- Ben R. Craig, 2003. "Why are TIIS yields so high? The case of the missing inflation-risk premium," Economic Commentary, Federal Reserve Bank of Cleveland, issue Mar.
- John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," NBER Chapters,in: NBER Macroeconomics Annual 1996, Volume 11, pages 155-208 National Bureau of Economic Research, Inc.
- John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," NBER Working Papers 5587, National Bureau of Economic Research, Inc.
- John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," Cowles Foundation Discussion Papers 1125, Cowles Foundation for Research in Economics, Yale University.
- Pu Shen & Jonathan Corning, 2001. "Can TIPS help identify long-term inflation expectations?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 61-87.
- Francis Breedon & Jag Chadha, 1997. "The Information Content of the Inflation Term Structure," Bank of England working papers 75, Bank of England.
- William R. Emmons, 2000. "The information content of Treasury inflation-indexed securities," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 25-38.
- David Jamieson Bolder & Scott Gusba, 2002. "Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada," Staff Working Papers 02-29, Bank of Canada. Full references (including those not matched with items on IDEAS)