Inflation Risk Premia in the US and the Euro Area
Bank for International Settlements, Monetary and Economic Department, 2010 - Bonds - 40 pages
We use a joint model of macroeconomic and term structure dynamics to estimate inflation risk premia in the United States and the euro area. To sharpen our estimation, we include in the information set macro data and survey data on inflation and interest rate expectations at various future horizons, as well as term structure data from both nominal and index-linked bonds. Our results show that, in both currency areas, inflation risk premia are relatively small, positive, and increasing in maturity. The cyclical dynamics of long-term inflation risk premia are mostly associated with changes in output gaps, while their high-frequency fluctuations seem to be aligned with variations in inflation. However, the cyclicality of inflation premia differs between the US and the euro area. Long term inflation premia are countercyclical in the euro area, while they are procyclical in the US.
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10-year inﬂation risk 103 Inv gamma 10y break-even 10y expected 10y inﬂation premium 2y break-even rate 2y expected inﬂation adjusted break-even rate affine functions aﬂine basis points Beta bond prices break-even inﬂation rates Central Bank Countercyclical D’Amico deﬁned Economics equation euro area data euro area inﬂation European Central Bank Figure ﬁnd ﬁrst ﬂuctuations gamma distribution higher inﬂation holding period return index-linked bonds indexation lag inflation inﬂation expectations inﬂation risk premia inﬂation shocks inﬂation to gap inﬂation to inﬂation investors likelihood function macro macroeconomic maturity model-implied monetary policy nominal and real nominal bond nominal yields Normal obtain output gap shocks posterior premium to gap premium to inﬂation prices of risk pricing kernel Prior distribution rate to gap rate to inﬂation real bond real rates real yields real zero-coupon yields response Sample period short rate short-term interest rate Speciﬁcally survey data survey forecasts term premia unobservable variables zero