49 Pages Posted: 4 Dec 2010
Date Written: November 26, 2010
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: 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