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Extracting deflation probability forecasts from Treasury yields

  • Jens H. E. Christensen
  • Jose A. Lopez
  • Glenn D. Rudebusch

We construct probability forecasts for episodes of price deflation (i.e., a falling price level) using yields on nominal and real U.S. Treasury bonds. The deflation probability forecasts identify two "deflation scares" during the past decade: a mild one following the 2001 recession, and a more serious one starting in late 2008 with the deepening of the financial crisis. The estimated deflation probabilities are generally consistent with those from macroeconomic models and surveys of professional forecasters, but they also provide highfrequency insight into the views of financial market participants. The probabilities can also be used to price the deflation option embedded in real Treasury bonds.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2011-10.

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Date of creation: 2011
Date of revision:
Handle: RePEc:fip:fedfwp:2011-10
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