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Inflation risks and inflation risk premia

  • García, Juan Angel
  • Werner, Thomas
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    This paper investigates the link between the perceived inflation risks in macroeconomic forecasts and the inflation risk premia embodied in financial instruments. We first provide some stylized facts about the term structure of inflation compensation, inflation expectations and inflation risk premia in the euro area bond market. Latent factor models like ours fit data well, but are often critisized for lacking economic interpretation. Using survey inflation risks, we show that perceived asymmetries in inflation risks help interpret the dynamics of long-term inflation risk premia, even after controlling for a large number of macro and financial factors. JEL Classification: G12, E31, E43

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    File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1162.pdf
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    Paper provided by European Central Bank in its series Working Paper Series with number 1162.

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    Date of creation: Mar 2010
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    Handle: RePEc:ecb:ecbwps:20101162
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    1. Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, vol. 115(2), pages 293-346, August.
    2. Hans Dewachter & Marco Lyrio, 2003. "Macro Factors and the Term Structure of Interest Rates," Center for Economic Studies - Discussion papers ces0304, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
    3. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a central bank perspective," Banco de Espa�a Occasional Papers 0705, Banco de Espa�a.
    4. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
    5. Wu, Tao, 2006. "Macro Factors and the Affine Term Structure of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1847-1875, October.
    6. Andrew Ang & Geert Bekaert, 2004. "The term structure of real rates and expected inflation," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    7. Bekaert, Geert & Cho, Seonghoon & Moreno Ibáñez, Antonio, 2006. "New-Keynesian Macroeconomics and the Term Structure," CEPR Discussion Papers 5956, C.E.P.R. Discussion Papers.
    8. Moench, Emanuel, 2008. "Forecasting the yield curve in a data-rich environment: A no-arbitrage factor-augmented VAR approach," Journal of Econometrics, Elsevier, vol. 146(1), pages 26-43, September.
    9. Philippe Mueller & Mikhail Chernov, 2008. "The Term Structure of Inflation Expectations," 2008 Meeting Papers 346, Society for Economic Dynamics.
    10. Joyce, Michael A.S. & Lildholdt, Peter & Sorensen, Steffen, 2010. "Extracting inflation expectations and inflation risk premia from the term structure: A joint model of the UK nominal and real yield curves," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 281-294, February.
    11. Hördahl, Peter & Tristani, Oreste, 2007. "Inflation risk premia in the term structure of interest rates," Working Paper Series 0734, European Central Bank.
    12. Giordani, Paolo & Soderlind, Paul, 2003. "Inflation forecast uncertainty," European Economic Review, Elsevier, vol. 47(6), pages 1037-1059, December.
    13. Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series 2006-15, Board of Governors of the Federal Reserve System (U.S.).
    14. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    15. Ejsing, Jacob & García, Juan Angel & Werner, Thomas, 2007. "The term structure of euro area break-even inflation rates: the impact of seasonality," Working Paper Series 0830, European Central Bank.
    16. Refet S. Gürkaynak & Andrew T. Levin & Eric T. Swanson, 2006. "Does inflation targeting anchor long-run inflation expectations? evidence from long-term bond yields in the U.S., U.K., and Sweden," Working Paper Series 2006-09, Federal Reserve Bank of San Francisco.
    17. Ciccarelli, Matteo & García, Juan Angel, 2009. "What drives euro area break-even inflation rates?," Working Paper Series 0996, European Central Bank.
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