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Inflation risk premia in the term structure of interest rates

  • Peter Hoerdahl
  • Oreste Tristani

This paper estimates the size and dynamics of inflation risk premia in the euro area, based on a joint model of macroeconomic and term structure dynamics. Information from both nominal and index-linked yields is used in the empirical analysis. Our results indicate that term premia in the euro area yield curve reflect predominantly real risks, i.e. risks which affect the returns on both nominal and index-linked bonds. On average, inflation risk premia were negligible during the EMU period but occasionally subject to statistically signifcant fluctuations in 2004-2006. Movements in the raw break-even rate appear to have mostly reflected such variations in inflation risk premia, while long-term inflation expectations have remained remarkably anchored from 1999 to date.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 228.

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Length: 50 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:bis:biswps:228
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