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Inflation Uncertainty and Disagreement in Bond Risk Premia

Stefania D'Amico and Athanasios Orphanides ()

No WP-2014-24, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: This paper examines the relation between variations in perceived inflation uncertainty and bond premia. Using the subjective probability distributions available in the Survey of Professional Forecasters we construct a quarterly time series of average individual uncertainty about inflation forecasts since 1968. We show that this ex-ante measure of inflation uncertainty differs importantly from measures of disagreement regarding inflation forecasts and other proxies, such as model-based ex-post measures of macroeconomic risk. Inflation uncertainty is an important driver of bond premia, but the relation varies across inflation regimes. It is most important in the high-inflation regime early in the sample and the low-inflation regime over the last 15 years. Once the role of inflation uncertainty is accounted for, disagreement regarding inflation forecasts appears a much less important driver of bond premia.

Keywords: Survey expectations; probabilistic forecasts; heterogeneity; inflation uncertainty; bond risk premia (search for similar items in EconPapers)
JEL-codes: C53 E37 E44 E47 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-mac and nep-upt
Date: 2014-01-11
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