The term structure of inflation expectations

Mikhail Chernov and Philippe Mueller ()

Journal of Financial Economics, 2012, vol. 106, issue 2, 367-394

Abstract: We use information in the term structure of survey-based forecasts of inflation to estimate a factor hidden in the nominal yield curve. We construct a model that accommodates forecasts over multiple horizons from multiple surveys and Treasury real and nominal yields by allowing for differences between risk-neutral, subjective, and objective probability measures. We establish that model-based inflation expectations are driven by inflation, output, and one latent factor. We find that this factor affects inflation expectations at all horizons but has almost no effect on the nominal yields; that is, the latent factor is hidden. We show that this hidden factor is not related to either current and past inflation or the standard set of macro variables studied in the literature. Consistent with the theoretical property of a hidden factor, our model outperforms a standard macro-finance model in its forecasting of inflation and yields.

Keywords: Affine term structure models; Macro factors; Hidden factors; Survey forecasts (search for similar items in EconPapers)
JEL-codes: C58 E43 G12 G17 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (111)

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Related works:
Working Paper: The Term Structure of Inflation Expectations (2008)
Working Paper: The Term Structure of Inflation Expectations (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:106:y:2012:i:2:p:367-394

DOI: 10.1016/j.jfineco.2012.06.004

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