Disagreement about inflation and the yield curve

Paul Ehling, Michael Gallmeyer, Christian Heyerdahl-Larsen and Philipp Illeditsch

Journal of Financial Economics, 2018, vol. 127, issue 3, 459-484

Abstract: We show that inflation disagreement, not just expected inflation, has an impact on nominal interest rates. In contrast to expected inflation, which mainly affects the wedge between real and nominal yields, inflation disagreement affects nominal yields predominantly through its impact on the real side of the economy. We show theoretically and empirically that inflation disagreement raises real and nominal yields and their volatilities. Inflation disagreement is positively related to consumers’ cross-sectional consumption growth volatility and trading in fixed income securities. Calibrating our model to disagreement, inflation, and yields reproduces the economically significant impact of inflation disagreement on yield curves.

Keywords: Inflation disagreement; Real and nominal yields; Yield volatilities; Cross-sectional consumption growth volatility; Speculative trade (search for similar items in EconPapers)
JEL-codes: D51 E43 E52 G12 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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Working Paper: Disagreement about inflation and the yield curve (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:127:y:2018:i:3:p:459-484

DOI: 10.1016/j.jfineco.2018.01.001

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