Inflation Risk Premia in the Term Structure of Interest Rates

50 Pages Posted: 25 Sep 2007

See all articles by Peter Hördahl

Peter Hördahl

Bank for International Settlements (BIS) - BIS Representative Office for Asia and the Pacific

Oreste Tristani

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Abstract

This paper estimates the size and dynamics of inflation risk premia in the euro area, based on a joint model of macroeconomic and term structure dynamics. Information from both nominal and index-linked yields is used in the empirical analysis. Our results indicate that term premia in the euro area yield curve reflect predominantly real risks, i.e. risks which affect the returns on both nominal and index-linked bonds. On average, inflation risk premia were negligible during the EMU period but occasionally subject to statistically signifcant fluctuations in 2004-2006. Movements in the raw break-even rate appear to have mostly reflected such variations in inflation risk premia, while long-term inflation expectations have remained remarkably anchored from 1999 to date.

Keywords: Term structure of interest rates, inflation risk premia, central bank credibility

JEL Classification: E43, E44

Suggested Citation

Hoerdahl, Peter and Tristani, Oreste, Inflation Risk Premia in the Term Structure of Interest Rates. BIS Working Paper No. 228, Available at SSRN: https://ssrn.com/abstract=1013578 or http://dx.doi.org/10.2139/ssrn.1013578

Peter Hoerdahl (Contact Author)

Bank for International Settlements (BIS) - BIS Representative Office for Asia and the Pacific ( email )

78th floor, Two International Finance Centre
8 Finance Street, Central
Hong Kong

Oreste Tristani

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
186
Abstract Views
1,222
Rank
98,662
PlumX Metrics