Inflation Compensation and Monetary Policy

36 Pages Posted: 7 Jan 2021 Last revised: 10 Mar 2021

See all articles by Xingyu Sonya Zhu

Xingyu Sonya Zhu

Bank for International Settlements (BIS)

Vasilis Dedes

BlackRock, Inc

Date Written: September 25, 2020


We examine the transmission mechanism of monetary policy to inflation markets. We decompose monetary policy shocks in the United States into two orthogonal channels: the policy channel, measured by the change in 2-year nominal Treasury yield, and the communication channel, measured by the orthogonal change in 10-year nominal Treasury yield. We find that the conventional monetary policy affects long-term market-based inflation compensation through the communication channel, while the unconventional monetary policy affects short-term market-based inflation compensation through the policy channel. Our analysis also indicates that an announcement of quantitative easing corrects the short-term mispricing between the two inflation compensation measures, but amplifies long-term mispricing.

Keywords: monetary policy, inflation compensation, zero bound, quantitative easing, term structure

JEL Classification: E31, E43, E52, G12

Suggested Citation

Zhu, Xingyu and Dedes, Vasilis, Inflation Compensation and Monetary Policy (September 25, 2020). Swedish House of Finance Research Paper No. 21-5, Available at SSRN: or

Xingyu Zhu (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
0763508422 (Phone)

Vasilis Dedes

BlackRock, Inc ( email )

United Kingdom

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