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Deriving Estimates of Inflation Expectations from the Prices of UK Government Bonds


  • Mark Deacon
  • Andrew Derry


Bonds with payments linked to the Retail Price Index were first issued in the United Kingdom in 1981 and now account for a significant proportion of the total UK government bond market. This paper discusses various methods by which prices of these indexed bonds can be compared with prices of conventional bonds to infer market expectations of future inflation, and in particular outlines the approach currently used to produce the inflation term structure published in the Bank of England's Inflation Report. There are a number of estimation difficulties - both theoretical and practical - in deriving such term structures and therefore a number of caveats that should be borne in mind when interpreting such measures of expectations.

Suggested Citation

  • Mark Deacon & Andrew Derry, 1994. "Deriving Estimates of Inflation Expectations from the Prices of UK Government Bonds," Bank of England working papers 23, Bank of England.
  • Handle: RePEc:boe:boeewp:23

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    References listed on IDEAS

    1. Paul Fisher & Juna Vega, 1993. "An Empirical Analysis of M4 in the United Kingdom," Bank of England working papers 21, Bank of England.
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    Cited by:

    1. Gerardo M Licandro, 2001. "Monetary Policy Coordination, Monetary Integration and other essays," Levine's Working Paper Archive 625018000000000172, David K. Levine.
    2. Seppälä, Juha, 2000. "The term structure of real interest rates : Theory and evidence form UK index-linked bonds," Research Discussion Papers 22/2000, Bank of Finland.
    3. Andreas Reschreiter, 2010. "Indexed bonds and revisions of inflation expectations," Annals of Finance, Springer, vol. 6(4), pages 537-554, October.
    4. David Barr & John Campbell, "undated". "Inflation, real interest rates and the bond market: a study of UK nominal and index-linked Government bond prices," CERF Discussion Paper Series 95-09, Economics and Finance Section, School of Social Sciences, Brunel University.
    5. van Landschoot, A., 2003. "The Term Structure of Credit Spreads on Euro Corporate Bonds," Discussion Paper 2003-046, Tilburg University, Center for Economic Research.
    6. Kanas, Angelos, 2014. "Bond futures, inflation-indexed bonds, and inflation risk premium," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 82-99.
    7. Mark M. Spiegel, 1998. "Central bank independence and inflation expectations: evidence from British index-linked gilts," Economic Review, Federal Reserve Bank of San Francisco, pages 3-14.
    8. Schich, Sebastian T., 1996. "Alternative specifications of the German term structure and its information content regarding inflation," Discussion Paper Series 1: Economic Studies 1996,08e, Deutsche Bundesbank.
    9. Daniel Heller & Yvan Lengwiler, 1998. "The auctions of Swiss government bonds: should the Treasury price discriminate or not?," Finance and Economics Discussion Series 1998-11, Board of Governors of the Federal Reserve System (U.S.).
    10. Clark, Ephraim & Lakshmi, Geeta, 2004. "Sovereign debt and the cost of migration: India 1990-1992," Journal of Asian Economics, Elsevier, vol. 15(1), pages 111-134, February.
    11. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
    12. Seppala, Juha, 2004. "The term structure of real interest rates: theory and evidence from UK index-linked bonds," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1509-1549, October.
    13. Pu Shen & Jonathan Corning, 2001. "Can TIPS help identify long-term inflation expectations?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 61-87.
    14. Matías Bernier B & Felipe Alarcón G. ., 2009. "Diferencias en Medidas de Compensación Inflacionaria y Swap Spread," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 12(1), pages 105-116, April.

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