Inflation forecasts extracted from nominal and real yield curves

Alois Geyer, Michael Hanke and Alex Weissensteiner

The Quarterly Review of Economics and Finance, 2016, vol. 60, issue C, 180-188

Abstract: The aim of this paper is to evaluate the performance of inflation forecasts backed out from the nominal and real yield curves in the United Kingdom. We use the Nelson–Siegel (NS) framework to model the break-even inflation term structure, and we base our analysis on the one-day break-even inflation derived from NS factors, which avoids the need for a direct estimation of the inflation risk premium. Fitting (vector) autoregression models augmented with nominal and/or real Cochrane-Piazzesi factors, we find that parsimonious models based on the one-day break-even inflation outperform other models in forecasting inflation out-of-sample. In addition, we quantify the parameter uncertainty and show that it may have considerable impact on inflation forecasts.

Keywords: Inflation forecasts; Break-even inflation; Cochrane-Piazzesi factor; Nelson–Siegel model; Parameter uncertainty (search for similar items in EconPapers)
JEL-codes: E31 E37 E43 G01 G17 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:60:y:2016:i:c:p:180-188

DOI: 10.1016/j.qref.2015.10.002

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