Inflation risk premia in the US and the euro area

Oreste Tristani and Peter Hördahl

No 1270, Working Paper Series from European Central Bank

Abstract: We use a joint model of macroeconomic and term structure dynamics to estimate inflation risk premia in the United States and the euro area. To sharpen our estimation, we include in the information set macro data and survey data on inflation and interest rate expectations at various future horizons, as well as term structure data from both nominal and index-linked bonds. Our results show that, in both currency areas, inflation risk premia are relatively small, positive, and increasing in maturity. The cyclical dynamics of long-term inflation risk premia are mostly associated with changes in output gaps, while their high-frequency fluctuations seem to be aligned with variations in inflation. However, the cyclicality of inflation premia differs between the US and the euro area. Long term inflation premia are countercyclical in the euro area, while they are procyclical in the US. JEL Classification: E43, E44

Keywords: central bank credibility; inflation risk premia; term structure of interest rates (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-upt
Note: 24907
References: View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Working Paper: Inflation risk premia in the US and the euro area (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20101270

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