Estimating Inflation Expectations with a Limited Number of Inflation-indexed Bonds

Richard Finlay and Sebastian Wende

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: We estimate inflation expectations and inflation risk premia using inflation forecasts from Consensus Economics and Australian inflation-indexed bond price data. Inflation-indexed bond prices are assumed to be non-linear functions of latent factors, which we model via an affine term structure model. We solve the model using a non-linear Kalman filter. While our results should not be interpreted too precisely due to data limitations and model complexity, they nonetheless suggest that long-term inflation expectations are well anchored within the 2 to 3 per cent inflation target range, while short-run inflation expectations are more volatile and more closely follow contemporaneous inflation. Further, while long-term inflation expectations are generally stable, inflation risk premia are much more volatile. This highlights the potential benefits of our measures over break-even measures of inflation which include both components.

Keywords: inflation expectations; inflation risk premia; affine term structure model; break-even inflation; non-linear Kalman filter (search for similar items in EconPapers)
JEL-codes: E31 E43 G12 (search for similar items in EconPapers)
Date: 2011-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.rba.gov.au/publications/rdp/2011/pdf/rdp2011-01.pdf (application/pdf)

Related works:
Journal Article: Estimating Inflation Expectations with a Limited Number of Inflation-Indexed Bonds (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2011-01

Access Statistics for this paper

More papers in RBA Research Discussion Papers from Reserve Bank of Australia Contact information at EDIRC.
Bibliographic data for series maintained by Paula Drew ().