Inflation expectations from index-linked bonds: Correcting for liquidity and inflation risk premia

Kajuth, Florian; Watzka, Sebastian (2011): Inflation expectations from index-linked bonds: Correcting for liquidity and inflation risk premia. In: Quarterly Review of Economics and Finance, Vol. 51, No. 3: pp. 225-235

Abstract

We propose a novel method to correct break-even inflation rates derived from index-linked bonds for liquidity and inflation risk premia without resorting to survey based measures. In a state-space framework the difference between break-even inflation rates and unobserved true inflation expectation is explained by measures of time-varying liquidity and inflation risk premia. Our results have better forecasting performance for the average annual inflation rate over the following 10 years than raw break-even rates and the Survey of Professional Forecasters.

• Item Type: Journal article
• Faculties: Economics; Economics > Chairs > Seminar for Macroeconomics
• Subjects: 300 Social sciences > 330 Economics
• Language: English