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Modeling the Dynamics of Inflation Compensation

  • Markus Jochmann

    ()

    (University of Strathclyde)

  • Gary Koop

    ()

    (University of Strathclyde, Rimini Center for Economic Analysis.)

  • Simon M. Potter

    ()

    (Federal Reserve Bank of New York)

This paper investigates the relationship between short-term and long-term in‡ation expectations using daily data on in‡ation compen- sation. We use a ‡exible econometric model which allows us to uncover this relationship in a data-based manner. We relate our ndings to the issue of whether in‡ation expectations are anchored, unmoored or contained. Our empirical results indicate no support for either unmoored or rmly anchored in‡ation expectations. Most evidence indicates that in‡ation expectations are contained.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 15_09.

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Date of creation: Jan 2009
Date of revision: Jan 2009
Handle: RePEc:rim:rimwps:15_09
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  1. 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.
  2. Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 385-426.
  3. James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
  4. Sangjoon Kim & Neil Shephard, 1994. "Stochastic volatility: likelihood inference and comparison with ARCH models," Economics Papers 3., Economics Group, Nuffield College, University of Oxford.
  5. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," Cowles Foundation Discussion Papers 858, Cowles Foundation for Research in Economics, Yale University.
  6. J. Durbin, 2002. "A simple and efficient simulation smoother for state space time series analysis," Biometrika, Biometrika Trust, vol. 89(3), pages 603-616, August.
  7. Jennifer Roush & William Dudley & Michelle Steinberg Ezer, 2008. "The case for TIPS: an examination of the costs and benefits," Staff Reports 353, Federal Reserve Bank of New York.
  8. Schotman, Peter C. & Schweitzer, Mark, 2000. "Horizon sensitivity of the inflation hedge of stocks," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 301-315, November.
  9. Jon Faust & Dale W. Henderson, 2004. "Is inflation targeting best-practice monetary policy?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 117-144.
  10. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, 02.
  11. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
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