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An analysis of objective inflation expectations and inflation risk premia

Author

Listed:
  • Sara Cecchetti

    (Bank of Italy)

  • Adriana Grasso

    (European Central Bank)

  • Marcello Pericoli

    (Bank of Italy)

Abstract

We study euro-area risk-adjusted expected inflation and the inflation risk premium at different maturities, leveraging inflation swaps, inflation options and survey-based forecasts. We introduce a model that features time-varying long-term average inflation and time-varying inflation volatility and we anchor market-based risk-adjusted measures of expected inflation to survey-based inflation forecasts. The results show that medium-term risk-adjusted expected inflation was close to the ECB's aim from 2010 to mid-2014, has since fallen to a low in March 2020 and has risen significantly since the second half of 2021. The medium-term inflation risk premium was positive until 2014 and turned negative since 2015 despite a sharp rise at the end of 2021. The risk-adjusted probabilities of exceeding the ECB's inflation aim and of seeing deflation over the medium term have been low on average.

Suggested Citation

  • Sara Cecchetti & Adriana Grasso & Marcello Pericoli, 2022. "An analysis of objective inflation expectations and inflation risk premia," Temi di discussione (Economic working papers) 1380, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1380_22
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2022/2022-1380/en_tema_1380.pdf
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    References listed on IDEAS

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    Cited by:

    1. Massimo De Felice & Franco Moriconi, 2023. "Stochastic Chain-Ladder Reserving with Modeled General Inflation," Risks, MDPI, vol. 11(12), pages 1-31, December.
    2. Stefano Neri & Guido Bulligan & Sara Cecchetti & Francesco Corsello & Andrea Papetti & Marianna Riggi & Concetta Rondinelli & Alex Tagliabracci, 2022. "On the anchoring of inflation expectations in the euro area," Questioni di Economia e Finanza (Occasional Papers) 712, Bank of Italy, Economic Research and International Relations Area.
    3. Ignazio Visco, 2023. "Inflation Expectations and Monetary Policy in the Euro Area," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 51(2), pages 111-129, September.

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    More about this item

    Keywords

    inflation density; inflation risk premium; objective probability;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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

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