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The eurozone (expected) inflation: an option’s eyes view

Author

Listed:
  • Ricardo Gimeno

    () (Banco de España)

  • Alfredo Ibáñez

    () (Instituto tecnológico autónomo de Mexico)

Abstract

We estimate inflation risk-neutral densities (RNDs) in the Euro area since 2009. We use Euro inflation swaps and caps/floors options, and introduce a simple and parsimonious approach to jointly estimate the RNDs across horizons. This way, we obtain the implicit RND for forward measures, like the five-on-five years inflation rate, which, although it is not directly traded in the market, it is a key rate for monetary policy. Then, we discuss several indicators derived from the information content of the historical RNDs that are useful for monetary policy and compare them in the light of the ECB’s decisions and communication over the last few years. Specically, the evolution of tails risks (associated with deflation and high inflation); the balance of inflation risks; measures of risk aversion from the ECB’s Survey of Professional Forecasters (SPF); and how forward inflation rates react to the ECB’s non-conventional monetary policies (Longer Term Renancing Operations, LTRO, Securities Market Programme, SMP, Asset Purchase Programme, APP, and its variants and extensions)

Suggested Citation

  • Ricardo Gimeno & Alfredo Ibáñez, 2017. "The eurozone (expected) inflation: an option’s eyes view," Working Papers 1722, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1722
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    1. repec:eee:jimfin:v:86:y:2018:i:c:p:70-92 is not listed on IDEAS
    2. Gimeno, Ricardo & Ibáñez, Alfredo, 2018. "The eurozone (expected) inflation: An option's eyes view," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 70-92.
    3. Ciccarelli, Matteo & Osbat, Chiara, 2017. "Low inflation in the euro area: Causes and consequences," Occasional Paper Series 181, European Central Bank.
    4. Juan Angel Garcia & Aubrey Poon, 2018. "Trend Inflation and Inflation Compensation," IMF Working Papers 18/154, International Monetary Fund.
    5. Ciccarelli, Matteo & García, Juan Angel, 2015. "International spillovers in inflation expectations," Working Paper Series 1857, European Central Bank.

    More about this item

    Keywords

    inflation compensation; inflation options; risk-neutral densities; inflation risk aversion; balance of inflation risks;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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