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Disagreement about inflation and the yield curve

Paul Ehling (), Michael Gallmeyer (), Christian Heyerdahl-Larsen () and Philipp Illeditsch ()
Additional contact information
Paul Ehling: BI norwegian business school
Philipp Illeditsch: University of Pennsylvania

No 1532, Working Papers from Banco de España, Working Papers Homepage

Abstract: We show theoretically that inflation disagreement drives a wedge between real and nominal yields and raises their levels and volatilities. We demonstrate empirically that an inflation disagreement increase of one standard deviation raises real and nominal yields and their volatilities, break-even inflation, and the inflation risk premium by at least 30% of their respective standard deviations. Inflation disagreement is positively related to consumers’ cross-sectional consumption growth volatility and trading in bonds, interest rate futures, and inflation swaps. Calibrating the model to disagreement, inflation, and yield data reproduces the economically significant impact of inflation disagreement on real and nominal yield curves.

Keywords: Inflation disagreement; relative entropy; real and nominal yields; yield volatilities; break-even inflation; inflation risk premium; cross-sectional consumption growth volatility; trading on inflation (search for similar items in EconPapers)
JEL-codes: D51 E43 E52 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2015-11
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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... /15/Fich/dt1532e.pdf First version, November 2015 (application/pdf)

Related works:
Journal Article: Disagreement about inflation and the yield curve (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1532

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