The Term Structure of Inflation Expectations

56 Pages Posted: 19 Mar 2008 Last revised: 2 Apr 2009

See all articles by Mikhail Chernov

Mikhail Chernov

UCLA Anderson

Philippe Mueller

Warwick Business School Finance Group

Multiple version iconThere are 2 versions of this paper

Date Written: April 17, 2008


We use evidence from the term structure of inflation expectations implicit in the nominal yields and survey forecasts of inflation to address the question of whether or not monetary policy is effective. We construct a model that accommodates forecasts over multiple horizons from multiple surveys and Treasury yields by allowing for differences between risk-neutral, subjective, and objective probability measures. We extract private sector expectations of inflation from this model and establish that they are driven by inflation, real activity and one latent factor, which is correlated with survey forecasts. We show that the interest rate responds to this survey factor. The inflation premium and out-of-sample estimates of the inflation longrun mean and persistence suggest that monetary policy became effective over time. As an implication, our model outperforms a standard macro-finance model in inflation and yield forecasting.

Keywords: inflation expectations, monetary policy, macro-finance, term structure model

JEL Classification: E43, E47, E52, G12

Suggested Citation

Chernov, Mikhail and Mueller, Philippe, The Term Structure of Inflation Expectations (April 17, 2008). Available at SSRN: or

Mikhail Chernov (Contact Author)

UCLA Anderson ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Philippe Mueller

Warwick Business School Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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