Understanding Inflation-Indexed Bond Markets

John Campbell, Robert J. Shiller (robert.shiller@yale.edu) and Luis Viceira (lviceira@hbs.edu)
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Robert J. Shiller: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/robert-shiller

No 1696, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper explores the history of inflation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990's until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation-indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed yields and high short-term volatility of inflation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade.

Keywords: Expectations hypothesis; Liquidity; Term premia; TIPS (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2009-05
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-his, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

Published in Brookings Papers on Economic Activity (Spring 2009), 79-120

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Related works:
Journal Article: Understanding Inflation-Indexed Bond Markets (2009)
Working Paper: Understanding Inflation-Indexed Bond Markets (2009)
Working Paper: Understanding Inflation-Indexed Bond Markets (2009)
Working Paper: Understanding Inflation-Indexed Bond Markets (2009)
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