Breakeven inflation rates and their puzzling correlation relationships

Gilbert Cette and Marielle de Jong ()

Working papers from Banque de France

Abstract: It is generally assumed that the two Fisher components of the interest rate -the real interest and the inflation- evolve independently over time, considering that they are driven by unrelated economical events. However, the market pricing of those components deduced from newly-available bond data does not provide conclusive evidence. While studying the price behaviour of inflation-linked (real) bonds beside nominal bonds in the major fixed-income markets, we observe that the real bond yields and the yield differentials, the breakeven inflation rates, have the propensity to be positively correlated between each other across the various countries, yet are pushed into a negative correlation relationship due to market-related price distortions. As long as those distortions are local, the net result is near-zero correlation within countries; when they become global, as in the heat of the current crisis, the correlations turn negative worldwide. In this paper insight is gained by taking an innovative worldwide study approach and thanks to revealing crisis period events.

Keywords: inflation-linked bonds; breakeven inflation; Fisher hypothesis. (search for similar items in EconPapers)
JEL-codes: E43 G15 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2012
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Breakeven inflation rates and their puzzling correlation relationships (2013)
Working Paper: Breakeven inflation rates and their puzzling correlation relationships (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:367

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