Disagreement about inflation and the yield curve |
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Authors: | Paul Ehling Michael Gallmeyer Christian Heyerdahl-Larsen Philipp Illeditsch |
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Institution: | 1. Department of Finance, BI Norwegian Business School, Nydalsveien 37, Oslo 0484, Norway;2. University of Virginia, McIntire School of Commerce, Rouss and Robertson Halls, Charlottesville, VA 22904-4173, USA;3. Department of Finance, London Business School, Sussex Place, London NW1 4SA, UK;4. Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213, USA |
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Abstract: | We show that inflation disagreement, not just expected inflation, has an impact on nominal interest rates. In contrast to expected inflation, which mainly affects the wedge between real and nominal yields, inflation disagreement affects nominal yields predominantly through its impact on the real side of the economy. We show theoretically and empirically that inflation disagreement raises real and nominal yields and their volatilities. Inflation disagreement is positively related to consumers’ cross-sectional consumption growth volatility and trading in fixed income securities. Calibrating our model to disagreement, inflation, and yields reproduces the economically significant impact of inflation disagreement on yield curves. |
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Keywords: | Inflation disagreement Real and nominal yields Yield volatilities Cross-sectional consumption growth volatility Speculative trade D51 E43 E52 G12 |
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