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Using the Treasury Nominal and Inflation-Indexed Spread to Estimate Expected Long-Run Changes in the CPI-U under Inflation Uncertainty, Risk Aversion, and the Probability of Deflation: Technical Paper 2003-10

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  • Angelo Mascaro

Abstract

Yield spreads between rates on Treasury nominal and inflation-indexed securities are thought to be distorted measures of expected inflation because of various biases. Three sources of bias are investigated in this paper: risk aversion, inflation uncertainty, and failure to account for the explicit option on the redemption value of the Treasury’s inflation-indexed security when there is a probability of deflation. The analysis produces estimates of all three biases. It finds that significant bias could arise from the second and third sources, while any bias from the first

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  • Angelo Mascaro, 2003. "Using the Treasury Nominal and Inflation-Indexed Spread to Estimate Expected Long-Run Changes in the CPI-U under Inflation Uncertainty, Risk Aversion, and the Probability of Deflation: Technical Paper," Working Papers 14933, Congressional Budget Office.
    • Handle: RePEc:cbo:wpaper:14933
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    File URL: https://www.cbo.gov/sites/default/files/108th-congress-2003-2004/workingpaper/2003-10_0.pdf
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    Cited by:

    1. Angelo Mascaro, 2004. "Using the Natural Rate Concept to Assess the Consistency of Projections Ten Years Ahead for Real Interest Rates and Inflation: Technical Paper 2004-05," Working Papers 15469, Congressional Budget Office.

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