Inflation or disinflation? Evidence from maturing US Treasury Inflation-Protected Securities

Quentin Chu, Deborah Pittman and Jeng-Hong Chen

Applied Economics, 2007, vol. 39, issue 3, 361-372

Abstract: The prices of maturing US Treasury Inflation-Protected Securities (TIPS) during the last 6-month coupon period reveal whether the market is anticipating an inflationary or disinflationary regime. Against the benchmark of the Treasury bill yield to adjust for the time value of money, maturing TIPS prices represent a sequence of updated forecasts of the consumer price index (CPI) to be used to determine the final single cash flow on the maturity date. Under the assumption of risk-neutrality, the sequence of forecasts is modelled as a martingale. Generalized method of moments and regression analysis are used to test two martingale properties of the CPI forecasts: (1) the unconditional mean of daily changes in the CPI forecasts is zero and (2) serial correlations of the daily changes in the CPI forecasts are zero. The test statistics reject both martingale properties of the CPI forecasts implied in maturing TIPS prices. A persistent upward movement of the CPI forecasts toward the actual target CPI during the first quarter of 2002 implies the market was then anticipating a disinflationary regime. One policy implication is that time series behaviour of CPI forecasts can provide timely feedback to the Federal Reserve Open Market Committee.

Date: 2007
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/00036840500438939 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:applec:v:39:y:2007:i:3:p:361-372

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036840500438939

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().