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Deriving Agents' Inflation Forecasts from the Term Structure of Interest Rates

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  • Christopher Ragan

    (Bank of Canada)

Abstract

In this paper, the author uses the term structure of nominal interest rates to construct estimates of agents' expectations of inflation over several medium-term forecast horizons. The Expectations Hypothesis is imposed together with the assumption that expected future real interest rates are given by current real rates. Under these maintained assumptions, it is possible to compare the nominal yields on two assets of different maturities and attribute the difference in nominal yields to differences in expected inflation over the two horizons (assuming a constant term premium). The results for the United States and Canada over the past several years suggest that there is a significant static element to agents' inflation expectations. A l'aide de la structure par terme des taux d'interet nominaux, l'auteur etablit sur plusieurs horizons de prevision a moyen terme des estimations des anticipations d'inflation que forment les agents economiques. L'hypothese d'anticipations de la courbe de rendement est retenue conjointement avec celle selon laquelle les taux d'interet reels futurs anticipes sont donnes par les taux reels du moment. Sous ces deux hypotheses, il est possible de comparer les taux de rendement nominaux de deux actifs a echeances differentes et d'attribuer l'ecart entre ces taux aux divergences entre les taux d'inflation anticipes sur les deux horizons (en supposant que la prime payable a l'echeance est constante). Les resultats obtenus pour les Etats-Unis et le Canada au cours des dernieres annees laissent croire que les anticipations d'inflation des agents economiques sont en grande partie statiques.

Suggested Citation

  • Christopher Ragan, "undated". "Deriving Agents' Inflation Forecasts from the Term Structure of Interest Rates," Staff Working Papers 95-1, Bank of Canada.
  • Handle: RePEc:bca:bocawp:95-1
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    References listed on IDEAS

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    Cited by:

    1. Hugo Oliveros C., 1999. "Expectativas:Una Aproximación A Través De Modelos De Escogencia Discreta," BORRADORES DE ECONOMIA 002697, BANCO DE LA REPÚBLICA.
    2. Tomáš Holub & Jaromír Hurník, 2008. "Ten Years of Czech Inflation Targeting: Missed Targets and Anchored Expectations," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(6), pages 67-86, November.
    3. Söderlind, Paul, 1995. "Forward Interest Rates as Indicators of Inflation Expectations," CEPR Discussion Papers 1313, C.E.P.R. Discussion Papers.
    4. St-Amant, P., 1996. "Decomposing U.S. Nominal Interest Rates into Expected Inflation and Ex Ante Real Interest rates Using Structural VAR Methodology," Staff Working Papers 96-2, Bank of Canada.
    5. Viktor Kotlan, 2002. "Monetary Policy and the Term Spread in a Macro Model of a Small Open Economy," Working Papers 2002/01, Czech National Bank, Research Department.
    6. Angelo M. Fasolo & Marcelo Savino Portugal, 2003. "Imperfect Rationality and Inflationary Inertia: a New Estimation of the Phillips Curve for Brazil," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] b34, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    7. David R. Johnson, 1997. "Expected Inflation in Canada 1988-1995: An Evaluation of Bank of Canada Credibility and the Effect of Inflation Targets," Canadian Public Policy, University of Toronto Press, vol. 23(3), pages 233-258, September.
    8. Luis Eduardo Arango & María Angélica Arosemena, 2003. "El Tramo Corto de la Estructura a Plazo como predictor de Expectativas de Inflación en Colombia," Borradores de Economia 264, Banco de la Republica de Colombia.
    9. Mirdala, Rajmund, 2009. "Vplyv inflačných očakávaní na vývoj úrokových sadzieb v krajinách Višegrádskej štvorky
      [Inflation expectations and interest rates development in the Visegrad countries]
      ," MPRA Paper 17059, University Library of Munich, Germany.
    10. Bruno Feunou & Jean-Sébastien Fontaine, 2012. "Forecasting Inflation and the Inflation Risk Premiums Using Nominal Yields," Staff Working Papers 12-37, Bank of Canada.
    11. Butler, L, 1996. "The Bank of Canada's New Quarterly Porjection Model Part 4 : A Semi- Structural Method to Estimate Potential Output : Combining Economic Theory with a Time-Series Filter," Technical Reports 77, Bank of Canada.
    12. Hugo Oliveros, 1999. "Expectativas: Una Aproximación a Través de Modelos de Escogencia Discreta," Borradores de Economia 137, Banco de la Republica de Colombia.
    13. Mirdala, Rajmund, 2015. "Decomposing Euro Area Sovereign Debt Yields into Inflation Expectations and Expected Real Interest Rates," MPRA Paper 68866, University Library of Munich, Germany, revised Nov 2015.
    14. Viktor Kotlán, 2001. "Monetary policy and the term structure of interest rates in a small open economy - a model framework approach," Macroeconomics 0110003, EconWPA.

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