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The Term Structure of Inflation Expectations

Author

Listed:
  • Philippe Mueller

    (Columbia GSB)

  • Mikhail Chernov

    (London Business School and CEPR)

Abstract

Is monetary policy effective? We rely on the evidence from the term structure of inflation expectations implicit in the nominal yields and survey forecasts of inflation to address this question. We construct a model that accommodates forecasts over multiple horizons from multiple surveys and Treasury yields by allowing for differences between risk-neutral, subjective, and objective probability measures. We extract private sector expectations of inflation from this model and document that they are driven by inflation, real activity and only one of the two latent factors, which is correlated with survey forecasts. We show that interest rate responds to this ``survey'' factor. The inflation premium and out-of-sample estimates of the inflation long-run mean and persistence suggest that monetary policy became effective over time. As an implication, our model outperforms a standard macro-finance model in inflation and yield forecasting.

Suggested Citation

  • Philippe Mueller & Mikhail Chernov, 2008. "The Term Structure of Inflation Expectations," 2008 Meeting Papers 346, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:346
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    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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