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Inflation risk premia in the US and the euro area

Author

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  • Peter Hördahl
  • Oreste Tristani

Abstract

We use a joint model of macroeconomic and term structure dynamics to estimate inflation risk premia in the United States and the euro area. To sharpen our estimation, we include in the information set macro data and survey data on inflation and interest rate expectations at various future horizons, as well as term structure data from both nominal and index-linked bonds. Our results show that, in both currency areas, inflation risk premia are relatively small, positive, and increasing in maturity. The cyclical dynamics of long-term inflation risk premia are mostly associated with changes in output gaps, while their high-frequency fluctuations seem to be aligned with variations in inflation. However, the cyclicality of inflation premia differs between the US and the euro area. Long term inflation premia are countercyclical in the euro area, while they are procyclical in the US.

Suggested Citation

  • Peter Hördahl & Oreste Tristani, 2010. "Inflation risk premia in the US and the euro area," BIS Working Papers 325, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:325
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    References listed on IDEAS

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    1. Peter Hördahl & Oreste Tristani, 2012. "Inflation Risk Premia In The Term Structure Of Interest Rates," Journal of the European Economic Association, European Economic Association, vol. 10(3), pages 634-657, May.
    2. Peter Hordahl & Oreste Tristani & David Vestin, 2003. "A joint econometric model of macroeconomic and term structure," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    3. Peter Hördahl & Oreste Tristani & David Vestin, 2008. "The Yield Curve and Macroeconomic Dynamics," Economic Journal, Royal Economic Society, vol. 118(533), pages 1937-1970, November.
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    Citations

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    Cited by:

    1. Abrahams, Michael & Adrian, Tobias & Crump, Richard K. & Moench, Emanuel & Yu, Rui, 2016. "Decomposing real and nominal yield curves," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 182-200.
    2. Juan Andrés Espinosa-Torres & Luis Fernando Melo-Velandia & José Fernando Moreno-Gutiérrez, 2017. "Expectativas de inflación, prima de riesgo inflacionario y prima de liquidez: una descomposición del break-even inflation para los bonos del Gobierno colombiano," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, vol. 78, February.
    3. Andrea Berardi, 2013. "Inflation Risk Premia, Yield Volatility and Macro Factors," Working Papers 27/2013, University of Verona, Department of Economics.
    4. Kajuth, Florian & Watzka, Sebastian, 2011. "Inflation expectations from index-linked bonds: Correcting for liquidity and inflation risk premia," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 225-235, June.
    5. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2010. "Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 143-178, September.
    6. Ulrich, Maxim, 2013. "Inflation ambiguity and the term structure of U.S. Government bonds," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 295-309.
    7. Tosapol Apaitan, 2015. "Extracting Market Inflation Expectations: A Semi-structural Macro-finance Term Structure Model," PIER Discussion Papers 4., Puey Ungphakorn Institute for Economic Research, revised Sep 2015.
    8. Petra Gerlach & Peter Hördahl & Richhild Moessner, 2011. "Inflation expectations and the great recession," BIS Quarterly Review, Bank for International Settlements, March.
    9. Andreasen, Martin, 2011. "An estimated DSGE model: explaining variation in term premia," Bank of England working papers 441, Bank of England.

    More about this item

    Keywords

    term structure of interest rates; inflation risk premia; central bank credibility;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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