Deriving Inflation Expectations from Nominal and Inflation-Indexed Treasury Yields

24 Pages Posted: 21 Aug 2000

See all articles by Brian P. Sack

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section

Date Written: May 16, 2000

Abstract

This paper derives a measure of inflation compensation from the yields of a Treasury inflation-indexed security and a portfolio of STRIPS that has similar liquidity and duration as the indexed security. This measure can be used as a proxy for inflation expectations if the inflation risk premium is small. The calculated measure suggests that the rate of inflation expected over the next ten years fell from just under 3% in mid-1997 to just under 1 3/4% by early 1999, before rising back to about 2 1/2% by the beginning of 2000. This variation is more extensive than would have been expected from a simple model of inflation dynamics or from a survey measure of long-run inflation expectations.

Keywords: Inflation-indexed debt, inflation expectations, treasury market

JEL Classification: E31, E43

Suggested Citation

Sack, Brian P., Deriving Inflation Expectations from Nominal and Inflation-Indexed Treasury Yields (May 16, 2000). Available at SSRN: https://ssrn.com/abstract=236398 or http://dx.doi.org/10.2139/ssrn.236398

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