An analysis of objective inflation expectations and inflation risk premia

Sara Cecchetti (), Adriana Grasso () and Marcello Pericoli
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Sara Cecchetti: Bank of Italy
Adriana Grasso: European Central Bank

No 1380, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We study euro-area risk-adjusted expected inflation and the inflation risk premium at different maturities, leveraging inflation swaps, inflation options and survey-based forecasts. We introduce a model that features time-varying long-term average inflation and time-varying inflation volatility and we anchor market-based risk-adjusted measures of expected inflation to survey-based inflation forecasts. The results show that medium-term risk-adjusted expected inflation was close to the ECB's aim from 2010 to mid-2014, has since fallen to a low in March 2020 and has risen significantly since the second half of 2021. The medium-term inflation risk premium was positive until 2014 and turned negative since 2015 despite a sharp rise at the end of 2021. The risk-adjusted probabilities of exceeding the ECB's inflation aim and of seeing deflation over the medium term have been low on average.

Keywords: inflation density; inflation risk premium; objective probability (search for similar items in EconPapers)
JEL-codes: C22 C58 E31 E44 G12 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk, nep-mon and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1380_22

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