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The term structure of euro area break-even inflation rates: the impact of seasonality

  • Ejsing, Jacob
  • García, Juan Angel
  • Werner, Thomas
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    This paper provides a toolkit for extracting accurate information about inflation expectations using inflation-linked bonds. First, we show how to estimate term structures of zero-coupon real rates and break-even inflation rates (BEIRs) in the euro area. This improves the analysis of developments in inflation expectations by providing constant maturity measures. Second, we show that seasonality in consumer prices introduces misleading and quantitatively important time-varying distortions in the calculated BEIRs. We explain how to correct for this in the estimation of the term structure, and thus provide a unified framework for extracting constant maturity BEIRs corrected for seasonality. JEL Classification: E31, E43, G12

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    File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp830.pdf
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    Paper provided by European Central Bank in its series Working Paper Series with number 0830.

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    Date of creation: Nov 2007
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    Handle: RePEc:ecb:ecbwps:20070830
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    1. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a Central Bank perspective," Occasional Paper Series 62, European Central Bank.
    2. Michael Gapen, 2003. "Seasonal indexation bias in US Treasury Inflation-indexed Securities," Applied Financial Economics, Taylor & Francis Journals, vol. 13(7), pages 509-516.
    3. Martin D. D. Evans, 1998. "Real Rates, Expected Inflation, and Inflation Risk Premia," Journal of Finance, American Finance Association, vol. 53(1), pages 187-218, 02.
    4. Brian Sack, 2000. "Deriving inflation expectations from nominal and inflation-indexed Treasury yields," Finance and Economics Discussion Series 2000-33, Board of Governors of the Federal Reserve System (U.S.).
    5. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
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