Extracting Deflation Probability Forecasts from Treasury Yields

Jens Christensen, Jose Lopez and Glenn Rudebusch

International Journal of Central Banking, 2012, vol. 8, issue 4, 21-60

Abstract: We construct probability forecasts for episodes of price deflation (i.e., a falling price level) using yields on nominal and real U.S. Treasury bonds. The deflation probability forecasts identify two “deflation scares” during the past decade: a mild one following the 2001 recession and a more serious one starting in late 2008 with the deepening of the financial crisis. The estimated deflation probabilities are generally consistent with those from macroeconomic models and surveys of professional forecasters, but they also provide high-frequency insight into the views of financial market participants. The probabilities can also be used to price the deflation protection option embedded in real Treasury bonds.

JEL-codes: E31 E43 G12 G13 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (19)

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Related works:
Working Paper: Extracting deflation probability forecasts from Treasury yields (2011)
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