The term structure of inflation expectations

We use information in the term structure of survey-based forecasts of inflation to estimate a factor hidden in the nominal yield curve. We construct a model that accommodates forecasts over multiple horizons from multiple surveys and Treasury real and nominal yields by allowing for differences between risk-neutral, subjective, and objective probability measures. We establish that model-based inflation expectations are driven by inflation, output, and one latent factor. We find that this factor affects inflation expectations at all horizons but has almost no effect on the nominal yields; that is, the latent factor is hidden. We show that this hidden factor is not related to either current and past inflation or the standard set of macro variables studied in the literature. Consistent with the theoretical property of a hidden factor, our model outperforms a standard macro-finance model in its forecasting of inflation and yields.     

Hedging inflation risk in a developing economy: The case of Brazil

Inflation shocks are one of the pitfalls of developing economies and are usually difficult to hedge. This paper examines the optimal strategic asset allocation for a Brazilian investor seeking to hedge inflation risk at different horizons, ranging from one to 30 years. Using a vector-autoregressive specification to model inter-temporal dependency across variables, we measure the inflation hedging properties of domestic and foreign investments and carry out a portfolio optimisation. Our results show that foreign currencies complement traditional assets very efficiently when hedging a portfolio against inflation: around 70% of the portfolio should be dedicated to domestic assets (equities, inflation-linked (IL) bonds and nominal bonds), whereas 30% should be invested in foreign currencies, especially the US dollar and the euro.     

Inflation Differentials between Spain and the EMU: A DSGE Perspective

This paper estimates a dynamic stochastic general equilibrium model of a currency union with nominal rigidities to explain the sources of inflation differentials between the Economic Monetary Union (EMU) and one of its member countries, Spain. The paper finds that productivity shocks account for 85% of the variability of the inflation differential. Demand shocks explain a large fraction of output growth volatility but not variability in inflation differentials. In addition, the estimated model finds evidence that inflation dynamics are different across countries in the nontradable sector only. Finally, the Balassa–Samuelson effect does not appear to be an important driver of the inflation differential during the EMU period.     

The high-frequency impact of news on long-term yields and forward rates: Is it real?

Macroeconomic news announcements move yields and forward rates on nominal and index-linked bonds and inflation compensation. This paper estimates the reactions using high-frequency data on nominal and index-linked bond yields, allowing the effects of news announcements on real rates and inflation compensation to be parsed far more precisely than is possible using daily data. Long-term nominal yields and forward rates are very sensitive to macroeconomic news announcements. Inflation compensation is sensitive to announcements about price indices and monetary policy. However, for news announcements about real economic activity, such as nonfarm payrolls, the vast majority of the sensitivity is concentrated in real rates. Accordingly, most of the sizeable impact of news about real economic activity on the nominal term structure of interest rates represents changes in expected future real short-term interest rates and/or real risk premia rather than changes in expected future inflation and/or inflation risk premia. Such sensitivity of real rates to macroeconomics news is hard to rationalize within the framework of existing macroeconomic models.     

The decomposition of US and Euro area stock and bond returns and their sensitivity to economic state variables

This paper decomposes US and Euro area excess stock and bond return innovations into news factors using the Campbell–Schiller methodology. The results indicate that stock return volatility is mostly due to volatility of future excess return news. Inflation news plays a minor role although it is significantly correlated with excess return innovations. For the bond market too, it is future return news—not inflation news—that moves bond returns most. For finite investment horizons, however, asset market movements give a differential importance to the various news components. Results are comparable for the US and the Euro area, but differ in terms of magnitudes. In addition, sensitivities (‘betas’) to a set of state variables are estimated, yielding high interest rate betas and low money growth betas. Generally, inflation, unemployment and leading indicator betas are significant. Asset market exposures to oil and exchange rate changes are more significant for the Euro area than in the US.     

通货膨胀的惯性特征及其货币政策启示

通货膨胀惯性是指通货膨胀在受到随机扰动因素冲击后偏离其长期均衡水平的趋势会持续很久,通常用通胀自回归模型中滞后项系数之和来度量。混合的新凯恩斯主义菲利普斯曲线令人信服地解释了通货膨胀惯性的微观基础,即价格粘性和经济参与人的后视行为。高通货膨胀惯性会削弱货币政策调控的效果,提高中央银行反通胀的社会成本。中央银行承诺在较长时期内钉住一个稳定的名义锚(例如明确或隐性的通货膨胀目标制)则是降低通货膨胀惯性的有效途径。     

Term Structure of Consumption Risk Premia in the Cross Section of Currency Returns

I relate the downward‐sloping term structure of currency carry returns to compensation for currency exposures to macroeconomic risk embedded in the joint dynamics of U.S. consumption, inflation, nominal interest rate, and their stochastic variance. The interest rate and inflation shocks play a prominent role. Higher yield currencies exhibit higher multiperiod exposures to these shocks. The prices of these risk exposures are positive and sizeable across all investment horizons. The interest rate shock is qualitatively similar to the long‐run risk of Bansal and Yaron.     

The Gordon-Shapiro Dividend Growth Formula and Inflation

The share valuation model which discounts expected dividends is widely accepted in the finance literature. Beyond some point a constant growth rate in expected ividends is assumed. The accepted specification of this growth rate involves a constant retention rate for earnings, and is valid under no inflation. This paper derives the corresponding nominal formula under inflation using a retention rate defined in terms of inflation accounted earnings, and shows that its real counterpart is the accepted formula. It is also shown under inflation that the nominal formula using a retention rate defined in terms of historic cost earnings is considerably more complicated, and that a major error in share valuation results from mistakenly assuming the accepted formula to be valid in nominal terms with a retention rate defined in terms of inflation accounted earnings.     

Macroeconomic Implications of Term Structures of Interest Rates Under Stochastic Differential Utility with Non-Unitary EIS

This paper proposes a continuous-time term-structure model under stochastic differential utility with non-unitary elasticity of intertemporal substitution (EIS, henceforth) in a representative-agent endowment economy with mean-reverting expectations on real output growth and inflation. Using this model, we make clear structural relationships among a term structure of real and nominal interest rates, utility form and underlying economic factors (in particular, inflation expectation). Notably, we show that, if (1) the EIS is less than one, (2) the agent is comparatively more risk-averse relative to time-separable utility, (3) short-term interest rates are pro-cyclical, and (4) the rate of expected inflation is negatively correlated with the rate of real output growth and its expected rate, then a nominal yield curve can have a low instantaneous riskless rate and an upward slope.     

Are Indexed Bonds Really Inflation Proof? A Model of Real and Nominal Term Structures when Money has Real Effects

This paper studies the general behavior of the nominal and real term structures of interest rates in a general equilibrium framework. A central bank is introduced in the model as an agent facing a tradeoff between inflation and output and choosing a monetary policy variable. Prices and output are jointly determined in our model endogenously. Two multi-factor nominal and real term structure models are given as examples to illustrate the general model. In our economies, inflation indexed bonds are not completely inflation proof, but are still subject to the influence of inflation uncertainties. The models offer us an empirical framework that can be studied with indexed bond data and nominal bond data together in a single estimation.     

Trend inflation, wage and price rigidities, and productivity growth

What are the steady-state implications of inflation in a general-equilibrium model with real per capita output growth and staggered nominal price and wage contracts? Surprisingly, a benchmark calibration implies an optimal inflation rate of -1.9 percent. The analysis also shows that trend inflation has important effects on the economy when combined with nominal contracts and real output growth. Steady-state output and welfare losses are quantitatively important even for low values of trend inflation. Further, nominal wage contracting is found to be quantitatively more important than nominal price contracting in generating the results. This conclusion does not arise from price dispersion per se, but from an effect of nominal output growth on the optimal markup of monopolistically competitive labour suppliers. Finally, accounting for productivity growth is found to be important for calculating the welfare costs of inflation. Indeed, the presence of 2 percent productivity growth increases the welfare costs of inflation in the benchmark specification by a factor of four relative to the no-growth case.     

Pricing the term structure of inflation risk premia: Theory and evidence from TIPS

In this paper, we study inflation risk and the term structure of inflation risk premia in the United States' nominal interest rates through the Treasury Inflation Protection Securities (TIPS) with a multi-factor, modified quadratic term structure model with correlated real and inflation rates. We derive closed form solutions to the real and nominal term structures of interest rates that drastically facilitate the estimation of model parameters and improve the accuracy of the valuation of nominal rates and TIPS prices. In addition, we contribute to the literature by estimating the term structure of inflation risk premia implied from the TIPS market. The empirical evidence using data from the period of January 1998 through October 2007 indicates that the expected inflation rate, contrary to data derived from the consumer price indices, is very stable and the inflation risk premia exhibit a positive term structure.     

Modeling the dynamics of inflation compensation

This paper investigates the relationship between short-term and long-term inflation expectations using daily data on inflation compensation derived from the term structure of real and nominal interest rates. We use a flexible econometric model which allows us to uncover this relationship in a data-based manner. We relate our findings to the issue of whether inflation expectations are anchored, unmoored or contained. Our empirical results indicate no support for either unmoored or firmly anchored inflation expectations. Most evidence indicates that inflation expectations are contained.     

中央银行沟通、实际干预与通货膨胀稳定

近年来,中央银行沟通已成为一种重要的货币政策工具。本文把中央银行沟通因素引入修正的卢卡斯总供给函数,发现加大中央银行沟通力度有利于引导通货膨胀预期,稳定通货膨胀。采用2003-2009年月度数据,利用结构向量自回归方法对中央银行沟通及实际干预在稳定通货膨胀中的作用进行实证研究,主要结论如下:(1)正的中央银行沟通冲击能有效降低通货膨胀预期以及名义通货膨胀率,且时滞短;(2)正的实际干预(包括银行贷款利率、央票利率及货币供应量)冲击,在短期内不但不能降低通货膨胀预期及名义通货膨胀率,反而会加剧通货膨胀,出现"价格之谜"现象。此外,本文对大多数情况下我国中央银行沟通模棱两可的合理性进行了解释。     

Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?

Recent empirical studies suggest that nominal interest rates and expected inflation do not move together one-for-one in the long run, a finding at odds with many theoretical models. This article shows that these results can be deceptive when the process followed by inflation shifts infrequently. We characterize the shifts in inflation by a Markov switching model. Based upon this model's forecasts, we reexamine the long-run relationship between nominal interest rates and inflation. Interestingly, we are unable to reject the hypothesis that in the long run nominal interest rates reflect expected inflation one-for-one.     

IS THE REAL INTEREST RATE REALLY UNSTABLE?

If nominal interest rates have a unit root, but inflation and inflation forecast errors do not, ex-ante real interest rates are argued to have a unit root and are therefore nonstationary. I show that empirical tests for nonstationarity of real interest rates using such a deductive method can be misleading when the stationary inflation forecast errors are large relative to the variation of nominal interest rates.     

Raise Rates to Raise Inflation? Neo‐Fisherianism in the New Keynesian Model

Increasing the inflation target in a New Keynesian (NK) model may require increasing, rather than decreasing, the nominal interest rate in the short run. We refer to this positive short‐run comovement between the nominal rates and inflation conditional on a nominal shock as Neo‐Fisherianism. We show that the NK model is more likely to be Neo‐Fisherian the more persistent is the change in the inflation target and the more flexible are prices. Neo‐Fisherianism is driven by the forward‐looking nature of the model. Modifications that make the framework less forward‐looking make it less likely for the model to exhibit Neo‐Fisherianism.     

What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns

This paper uses a vector autoregressive model to decompose excess stock and 10-year bond returns into changes in expectations of future stock dividends, inflation, short-term real interest rates, and excess stock and bond returns. In monthly postwar U.S. data, stock and bond returns are driven largely by news about future excess stock returns and inflation, respectively. Real interest rates have little impact on returns, although they do affect the short-term nominal interest rate and the slope of the term structure. These findings help to explain the low correlation between excess stock and bond returns.     

Inflation Expectations and Risk Premiums in an Arbitrage‐Free Model of Nominal and Real Bond Yields

Differences between yields on comparable‐maturity U.S. Treasury nominal and real debt, the so‐called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums (IRP) from the BEI rates. We provide such decompositions using an affine arbitrage‐free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long‐term inflation expectations have been well anchored over the past few years, and IRP, although volatile, have been close to zero on average.     

Monetary policy and corporate default

When a corporation issues debt with a fixed nominal coupon, the real value of future payments decreases with the price level. Forward-looking corporate default decisions therefore depend on monetary policy through its impact on expected inflation. We build a general equilibrium economy with deadweight bankruptcy costs that demonstrates how nominal rigidities in corporate debt create an important role for monetary policy even in the absence of standard nominal frictions such as staggered price setting in the output market. Under a passive nominal interest rate peg, the direct effects of a negative productivity shock combine with deflation to produce strong incentives for corporate default. A debt-deflationary spiral results when there are real costs of financial distress. Inflation targeting eliminates this amplification mechanism but full inflation targeting requires permitting the nominal interest rate to depend explicitly on credit market conditions.