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Inflation Risk Premia in the US and the Euro Area

49 Pages Posted: 4 Dec 2010  

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

Date Written: November 26, 2010

Abstract

We use a joint model of macroeconomic and term structure dynamics to estimate inflation risk premia in the United States and the euro area. To sharpen our estimation, we include in the information set macro data and survey data on inflation and interest rate expectations at various future horizons, as well as term structure data from both nominal and index-linked bonds. Our results show that, in both currency areas, inflation risk premia are relatively small, positive, and increasing in maturity. The cyclical dynamics of long-term inflation risk premia are mostly associated with changes in output gaps, while their high-frequency fluctuations seem to be aligned with variations in inflation. However, the cyclicality of inflation premia differs between the US and the euro area. Long term inflation premia are countercyclical in the euro area, while they are procyclical in the US.

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

JEL Classification: E43, E44

Suggested Citation

Hördahl, Peter and Tristani, Oreste, Inflation Risk Premia in the US and the Euro Area (November 26, 2010). ECB Working Paper No. 1270. Available at SSRN: https://ssrn.com/abstract=1715397

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)

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