Disagreement about Inflation and the Yield Curve

139 Pages Posted: 26 Mar 2012 Last revised: 11 Aug 2020

See all articles by Paul Ehling

Paul Ehling

BI - Norwegian Business School

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce

Christian Heyerdahl-Larsen

BI Norwegian Business School

Philipp K. Illeditsch

Texas A&M University - Mays Business School - Finance Department

Multiple version iconThere are 2 versions of this paper

Date Written: December 22, 2016

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.

Keywords: Inflation disagreement, real and nominal yields, yield volatilities, cross-sectional consumption growth volatility, speculative trade

JEL Classification: D51, E43, E52, G12

Suggested Citation

Ehling, Paul and Gallmeyer, Michael F. and Heyerdahl-Larsen, Christian and Illeditsch, Philipp K., Disagreement about Inflation and the Yield Curve (December 22, 2016). Journal of Financial Economics (JFE), December 2016, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=2028391 or http://dx.doi.org/10.2139/ssrn.2028391

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

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Philipp K. Illeditsch

Texas A&M University - Mays Business School - Finance Department ( email )

Wehner Building 351Q
4113 TAMU | 210 Olsen Blvd
College Station, TX Brazos County 77843-4218
United States

HOME PAGE: http://https://sites.google.com/view/philippilleditsch

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