Decomposing market-based measures of inflation compensation into inflation expectations and risk premia

Valentin Burban, Bruno De Backer (), Fabian Schupp and Andreea Liliana Vladu

Economic Bulletin Boxes, 2022, vol. 8

Abstract: This box presents a model-based approach for distinguishing between two unobserved components embedded in market-based measures of inflation compensation, namely inflation expectations and inflation risk premia. The approach relies on econometric models used to analyse the term structure of inflation-linked swap rates. Estimates indicate that the rise in inflation compensation observed since mid-2020 is attributable more to inflation risk premia than to inflation expectations. This suggests that the rise is mainly related to a shift in the inflation risks priced in, from lower than expected to higher than expected. JEL Classification: E31, E43, E47

Keywords: expectations; Inflation-linked swaps; inflation risk premia; term structure (search for similar items in EconPapers)
Date: 2022-01
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