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The Term Structure of Inflation Expectations

Philippe Mueller () and Mikhail Chernov ()

No 346, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: Is monetary policy effective? We rely on the evidence from the term structure of inflation expectations implicit in the nominal yields and survey forecasts of inflation to address this question. We construct a model that accommodates forecasts over multiple horizons from multiple surveys and Treasury yields by allowing for differences between risk-neutral, subjective, and objective probability measures. We extract private sector expectations of inflation from this model and document that they are driven by inflation, real activity and only one of the two latent factors, which is correlated with survey forecasts. We show that interest rate responds to this ``survey'' factor. The inflation premium and out-of-sample estimates of the inflation long-run mean and persistence suggest that monetary policy became effective over time. As an implication, our model outperforms a standard macro-finance model in inflation and yield forecasting.

Date: 2008
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Journal Article: The term structure of inflation expectations (2012) Downloads
Working Paper: The Term Structure of Inflation Expectations (2008) Downloads
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More papers in 2008 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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