IDEAS home Printed from https://ideas.repec.org/p/cfm/wpaper/2437.html

How likely is an inflation disaster?

Author

Listed:
  • Jens Hilscher

    (University of California, Davis)

  • Alon Raviv

    (Bar-Ilan University)

  • Ricardo Reis

    (London School of Economics)

Abstract

Long-dated inflation swap contracts provide widely-used estimates of expected inflation. We develop methods to estimate complementary tail probabilities for persistently very high or low inflation using inflation options prices. We show that three new adjustments to conventional methods are crucial: inflation, horizon, and risk. An application of these methods finds: (i) US deflation risk in 2011-14 has been overstated, (ii) ECB unconventional policies lowered the deflation disaster probability, (iii) inflation expectations deanchored in 2021-22, (iv) and reanchored as policy tightened, (v) but the 2021-24 disaster left scars, (vi) US expectations are less sensitive to inflation realizations than in the EZ.

Suggested Citation

  • Jens Hilscher & Alon Raviv & Ricardo Reis, 2024. "How likely is an inflation disaster?," Discussion Papers 2437, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2437
    as

    Download full text from publisher

    File URL: https://www.lse.ac.uk/CFM/assets/pdf/CFM-Discussion-Papers-2024/CFMDP2024-37-Paper.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(2), pages 645-700.
    2. Birru, Justin & Figlewski, Stephen, 2012. "Anatomy of a meltdown: The risk neutral density for the S&P 500 in the fall of 2008," Journal of Financial Markets, Elsevier, vol. 15(2), pages 151-180.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Erwan Gautier & Frédérique Savignac & Olivier Coibion, 2025. "Firms’ Inflation and Wage Expectations During the Inflation Surge," NBER Working Papers 33799, National Bureau of Economic Research, Inc.
    2. Ghaderi, Mohammad & Seo, Sang Byung & Shaliastovich, Ivan, 2026. "Learning and subjective beliefs about good and bad inflation ranges," SAFE Working Paper Series 478, Leibniz Institute for Financial Research SAFE.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Siddiqi, Hammad, 2015. "Anchoring and Adjustment Heuristic: A Unified Explanation for Equity Puzzles," MPRA Paper 68729, University Library of Munich, Germany.
    2. Marlène Isoré, 2012. "Essays in macro-finance [Essais de macro-finance]," Sciences Po Economics Publications (main) tel-03669376, HAL.
    3. Sang Byung Seo & Jessica A. Wachter, 2019. "Option Prices in a Model with Stochastic Disaster Risk," Management Science, INFORMS, vol. 65(8), pages 3449-3469, August.
    4. Cakici, Nusret & Zaremba, Adam, 2022. "Salience theory and the cross-section of stock returns: International and further evidence," Journal of Financial Economics, Elsevier, vol. 146(2), pages 689-725.
    5. William Ginn, 2022. "Climate Disasters and the Macroeconomy: Does State-Dependence Matter? Evidence for the US," Economics of Disasters and Climate Change, Springer, vol. 6(1), pages 141-161, March.
    6. Allan Wright & Patrice Borda, 2016. "Macroeconomic Fluctuations Under Natural Disaster Shocks in Central America and the Caribbean," IDB Publications (Working Papers) 97076, Inter-American Development Bank.
    7. Falconio, Andrea & Manganelli, Simone, 2025. "Financial conditions, business cycle fluctuations and growth-at-risk," Journal of Economic Dynamics and Control, Elsevier, vol. 176(C).
    8. Tim Bollerslev & Sophia Zhengzi Li & Viktor Todorov, 2014. "Roughing up Beta: Continuous vs. Discontinuous Betas, and the Cross-Section of Expected Stock Returns," CREATES Research Papers 2014-48, Department of Economics and Business Economics, Aarhus University.
    9. Xu Cheng & Winston Wei Dou & Zhipeng Liao, 2022. "Macro‐Finance Decoupling: Robust Evaluations of Macro Asset Pricing Models," Econometrica, Econometric Society, vol. 90(2), pages 685-713, March.
    10. Gagnon, Marie-Hélène & Power, Gabriel J. & Toupin, Dominique, 2023. "The sum of all fears: Forecasting international returns using option-implied risk measures," Journal of Banking & Finance, Elsevier, vol. 146(C).
    11. Christian Hellwig & Aleh Tsyvinski & Elias Albagli, 2014. "Dynamic Dispersed Information and the Credit Spread Puzzle," 2014 Meeting Papers 808, Society for Economic Dynamics.
    12. Hasler, Michael & Marfè, Roberto, 2016. "Disaster recovery and the term structure of dividend strips," Journal of Financial Economics, Elsevier, vol. 122(1), pages 116-134.
    13. Koulovatianos, Christos & Li, Jian & Weber, Fabienne, 2018. "Market fragility and the paradox of the recent stock-bond dissonance," Economics Letters, Elsevier, vol. 162(C), pages 162-166.
    14. Aizenman, Joshua & Noy, Ilan, 2015. "Saving and the long shadow of macroeconomic shocks," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 147-159.
    15. Marlène Isoré & Urszula Szczerbowicz, 2013. "Disaster Risk in a New Keynesian Model," Working Papers 2013-12, CEPII research center.
    16. Tobias Adrian & Nina Boyarchenko & Domenico Giannone, 2019. "Vulnerable Growth," American Economic Review, American Economic Association, vol. 109(4), pages 1263-1289, April.
    17. Polyzos, Stathis & Samitas, Aristeidis & Kampouris, Ilias, 2021. "Economic stimulus through bank regulation: Government responses to the COVID-19 crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    18. Bruno Ćorić & Vladimir Šimić, 2021. "Economic disasters and aggregate investment," Empirical Economics, Springer, vol. 61(6), pages 3087-3124, December.
    19. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2022. "Overreaction and Diagnostic Expectations in Macroeconomics," Journal of Economic Perspectives, American Economic Association, vol. 36(3), pages 223-244, Summer.
    20. Emanuel Moench & Robin Schaal, 2025. "The impact of extreme weather events on the term structure of sovereign debt," Working Papers 11088, South African Reserve Bank.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • 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
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cfm:wpaper:2437. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Helen Power (email available below). General contact details of provider: https://edirc.repec.org/data/cmlseuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.