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March 2014 issue
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Pericoli
Kolasa, Lombardo
Altunbas, Gambacorta, Marques-Ibanez
Gerlach, Lewis
Franta, Baruník, Horváth, Smídková
Dincer, Eichengreen
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Real Term Structure and Inflation Compensation in the Euro Area

by Marcello Pericoli
Bank of Italy

Abstract

This paper estimates the term structure of zero-coupon real interest rates for the euro area implied by French indexlinked bonds with a smoothing spline methodology, which is very effective in capturing the general shape of the real term structure, while smoothing through idiosyncratic variations in the yields. A comparison shows that the chosen spline outperforms other methodologies commonly used in the literature across several dimensions. The paper also estimates a liquidity-adjusted nominal term structure to compute the constant-maturity inflation compensation. This compensation is compared with the surveyed inflation expectation in order to obtain a measure of the inflation risk premium in the euro area during the last decade.

JEL Codes: C02, G10, G12.

 
Full article (PDF, 42 pages, 1393 kb)