Inflation Forecasts Extracted from Nominal and Real Yield Curves

The Quarterly Review of Economics and Finance, 2016, 60, 180-188

22 Pages Posted: 19 Dec 2010 Last revised: 30 Jan 2018

See all articles by Alois Geyer

Alois Geyer

VGSF / WU

Michael Hanke

University of Liechtenstein

Alex Weissensteiner

Free University of Bolzano Bozen

Date Written: November 11, 2012

Abstract

he aim of this paper is to evaluate the performance of inflation forecasts backed out from the nominal and real yield curves in the United Kingdom. We use the Nelson-Siegel (NS) framework to model the break-even inflation term structure, and we also consider the one-day break-even inflation derived from NS parameters. In both cases we fit (vector) autoregression models, some of which are augmented by nominal and/or real Cochrane-Piazzesi factors. The paper provides three main results. First, parsimonious models based on the one-day break-even inflation outperform other models in forecasting inflation out-of-sample. Second, we quantify the parameter uncertainty, showing that it may have considerable impact on inflation forecasts, in particular after the Lehman Brothers event. Third, model-free forecasts directly obtained from break-even inflation rates are typically hard to beat by parametric alternatives.

Keywords: break-even inflation, Cochrane-Piazzesi factor, Nelson-Siegel model, parameter uncertainty

JEL Classification: E31, E37, E43, G01, G17

Suggested Citation

Geyer, Alois and Hanke, Michael and Weissensteiner, Alex, Inflation Forecasts Extracted from Nominal and Real Yield Curves (November 11, 2012). The Quarterly Review of Economics and Finance, 2016, 60, 180-188 . Available at SSRN: https://ssrn.com/abstract=1727068 or http://dx.doi.org/10.2139/ssrn.1727068

Alois Geyer

VGSF / WU ( email )

Welthandelsplatz 1
Institute for Financial Research
Vienna, 1020
Austria

HOME PAGE: http://www.wu.ac.at/~geyer

Michael Hanke

University of Liechtenstein ( email )

Fuerst Franz Josef-Strasse
Vaduz, FL-9490
Liechtenstein

Alex Weissensteiner (Contact Author)

Free University of Bolzano Bozen ( email )

Universitätsplatz 1
Bolzano, 39100
+39 0471 013496 (Phone)

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