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The term structure of inflation risk premia and macroeconomic dynamics

Author

Listed:
  • Peter Hördahl

    (European Central Bank)

  • Oreste Tristani

    (European Central Bank)

  • David Vestin

    (European Central Bank)

Abstract

This paper estimates the size and dynamics of inflation risk premia in the euro area using information from nominal and index-linked yields. Our main result is that the inflation risk premium on long-term nominal yields is nonnegligible from an economic viewpoint. Break-even inflation rates — i.e. the difference between nominal and real yields with identical maturity — therefore represent a relatively crude approximation of inflation expectations. Break-even inflation rates are also found to contain useful information to forecast inflation and output growth, even when taking into account standard indicators such as the slope of the yield curve

Suggested Citation

  • Peter Hördahl & Oreste Tristani & David Vestin, 2006. "The term structure of inflation risk premia and macroeconomic dynamics," Computing in Economics and Finance 2006 203, Society for Computational Economics.
    • Handle: RePEc:sce:scecfa:203
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    File URL: http://repec.org/sce2006/up.7189.1140616031.pdf
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    References listed on IDEAS

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    Cited by:

    1. Coffinet, J. & Frappa, S., 2008. "Macroeconomic Surprises and the Inflation Compensation Curve in the Euro Area," Working papers 220, Banque de France.

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    More about this item

    Keywords

    Term structure of interest rates; risk premia; policy rules;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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