TIPS Liquidity and the Outlook for Inflation

Martin M. Andreasen and Jens Christensen

FRBSF Economic Letter, 2016

Abstract: The prices of special securities known as TIPS can give some insight into how investors view the outlook for future inflation. New research uses a novel term structure model of nominal and real yields to estimate how much the liquidity premium embedded in the prices of these securities have varied over time. Accounting for variation in the premiums notably increases estimates of the inflation expectations underlying market-based measures of inflation compensation, particularly during the most recent financial crisis.

Date: 2016
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