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December 2012 issue
List of authors
 
Roman Horváth, Kateřina Šmídková and Jan Zápal
Jens H.E. Christensen, Jose A. Lopez, and Glenn D. Rudebusch
Philip Liu and Konstantinos Theodoridis
Güneş Kamber and Stephen Millard
Yassine Bouhdaoui and David Bounie
Blaise Gadanecz, Kostas Tsatsaronis, and Yener Altunbaş
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Extracting Deflation Probability Forecasts from Treasury Yields

by Jens H.E. Christensen, Jose A. Lopez, and Glenn D. Rudebusch
Federal Reserve Bank of San Francisco

Abstract

We construct probability forecasts for episodes of price deflation (i.e., a falling price level) using yields on nominal and real U.S. Treasury bonds. The deflation probability forecasts identify two “deflation scares” during the past decade: a mild one following the 2001 recession and a more serious one starting in late 2008 with the deepening of the financial crisis. The estimated deflation probabilities are generally consistent with those from macroeconomic models and surveys of professional forecasters, but they also provide high-frequency insight into the views of financial market participants. The probabilities can also be used to price the deflation protection option embedded in real Treasury bonds.

JEL Codes: E31, E43, G12, G13.

 
Full article (PDF, 40 pages 615 kb)