How likely is an inflation disaster?

Jens Hilscher, Alon Raviv and Ricardo Reis

No 2437, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: Long-dated inflation swap contracts provide widely-used estimates of expected inflation. We develop methods to estimate complementary tail probabilities for persistently very high or low inflation using inflation options prices. We show that three new adjustments to conventional methods are crucial: inflation, horizon, and risk. An application of these methods finds: (i) US deflation risk in 2011-14 has been overstated, (ii) ECB unconventional policies lowered the deflation disaster probability, (iii) inflation expectations deanchored in 2021-22, (iv) and reanchored as policy tightened, (v) but the 2021-24 disaster left scars, (vi) US expectations are less sensitive to inflation realizations than in the EZ.

Keywords: option prices; inflation derivatives; Arrow-Debreu securities (search for similar items in EconPapers)
JEL-codes: E31 E44 G13 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2024-09
New Economics Papers: this item is included in nep-mon and nep-rmg
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Working Paper: How likely is an inflation disaster? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2437

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