 Liquidity risk premia and breakeven inflation ratesPu Shen Economic Review, 2006, vol. 91, issue Q II, 29-54 Abstract: In recent years, monetary policymakers have monitored several measures of market expectations of future inflation. One of these measures is based on the yield differential between nominal and inflation indexed Treasury securities. This yield spread is also called the ?breakeven inflation rate.? An increase in the breakeven rate is sometimes viewed as a sign that market inflation expectations may be on the rise. For example, the FOMC frequently refers to the yield spread as a measure of ?inflation compensation? and considers the yield spread an indicator of inflation expectations in policy deliberations. ; Accurately inferring market expectations of inflation from yield spreads is difficult. The difficulty lies in the differences in market liquidity conditions between nominal and inflation indexed Treasury securities. ; Shen presents evidence that liquidity differences between nominal and inflation indexed Treasuries have been nontrivial. Consequently, simply attributing changes in yield spreads to changes in market inflation expectations and ignoring the liquidity risk premium could lead to inaccurate inflation expectations. Keywords: Inflation; (Finance) (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fip:fedker:y:2006:i:qii:p:29-54:n:v.91no.2 Ordering information: This journal article can be ordered from Access Statistics for this article More articles in Economic Review from Federal Reserve Bank of Kansas City Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.