Abstract

http://ssrn.com/abstract=2028391
 
 

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Disagreement about Inflation and the Yield Curve


Paul Ehling


BI - Norwegian Business School

Michael F. Gallmeyer


University of Virginia (UVA) - McIntire School of Commerce

Christian Heyerdahl-Larsen


London Business School - Department of Finance

Philipp K. Illeditsch


University of Pennsylvania - Finance Department

February 1, 2016


Abstract:     
We show that inflation disagreement, not just expected inflation, has a first-order effect 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.

Number of Pages in PDF File: 96

Keywords: Inflation disagreement, relative entropy, real and nominal yields, yield volatilities, cross-sectional consumption growth volatility, trading on inflation beliefs

JEL Classification: D51, E43, E52, G12


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Date posted: March 26, 2012 ; Last revised: February 15, 2016

Suggested Citation

Ehling, Paul and Gallmeyer, Michael F. and Heyerdahl-Larsen, Christian and Illeditsch, Philipp K., Disagreement about Inflation and the Yield Curve (February 1, 2016). Available at SSRN: http://ssrn.com/abstract=2028391 or http://dx.doi.org/10.2139/ssrn.2028391

Contact Information

Paul Ehling
BI - Norwegian Business School ( email )
N-0442 Oslo
Norway
+47 46410505 (Phone)
Michael F. Gallmeyer (Contact Author)
University of Virginia (UVA) - McIntire School of Commerce ( email )
P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-243-4043 (Phone)
434-924-7074 (Fax)
HOME PAGE: http://www.commerce.virginia.edu/faculty_research/facultydirectory/Pages/Gallmeyer.aspx
Christian Heyerdahl-Larsen
London Business School - Department of Finance ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
Philipp K. Illeditsch
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-3477 (Phone)

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