Macroeconomic Drivers of Inflation Expectations and Inflation Risk Premia

Abstract

We propose a new model to decompose inflation swaps into genuine inflation expectations and risk premiums. We develop a no-arbitrage term structure model with stochastic endpoints, separating macroeconomic variables into transitory parts and long-run, economically grounded determinants, such as the equilibrium real interest rate and the inflation target. Our estimations deliver new insights into how macroeconomic variables affect market-based inflation expectation measures.

Keywords: Inflation-linked swaps, affine term structure models, inflation expectations, inflation risk premia, inflation trend, shifting endpoints

JEL Classification: E31, E44, E52