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Extracting deflation probability forecasts from Treasury yields

Jens Christensen, Jose Lopez and Glenn Rudebusch

No 2011-10, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We construct probability forecasts for episodes of price deflation (i.e., a falling price level) using yields on nominal and real U.S. Treasury bonds. The deflation probability forecasts identify two \"deflation scares\" during the past decade: a mild one following the 2001 recession, and a more serious one starting in late 2008 with the deepening of the financial crisis. The estimated deflation probabilities are generally consistent with those from macroeconomic models and surveys of professional forecasters, but they also provide highfrequency insight into the views of financial market participants. The probabilities can also be used to price the deflation option embedded in real Treasury bonds.

Keywords: Deflation; (Finance) (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-for and nep-mac
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Citations: View citations in EconPapers (8)

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Journal Article: Extracting Deflation Probability Forecasts from Treasury Yields (2012) Downloads
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