Determinants of the inflation compensation curve in the euro area

Jerome Coffinet and Sébastien Frappa

The European Journal of Finance, 2010, vol. 16, issue 8, 769-783

Abstract: In this study, we analyse the effect of macroeconomic surprises on inflation compensation data - the sum of inflation expectation, risk and liquidity premia - in the euro area. The empirical analysis is based on a daily data set, which covers a wide spectrum of maturities, stemming from inflation-indexed markets between 2 January 2004 and 31 December 2007. Our results suggest that when gauging short- and medium-term inflation compensations, market operators are sensitive to surprises related to real activity and prices. Notwithstanding, long-term inflation compensations remain generally unresponsive to macroeconomic surprises, attesting the European Central Bank's high credibility on the sample under consideration. The study also cross-checks the results from two different euro area inflation-indexed instruments (bonds and swaps) which differ slightly regarding medium-term horizon but give a similar picture regarding long-term horizons.

Keywords: inflation compensation; macroeconomic surprises; euro area (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1080/1351847X.2010.481460

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