Inflation Risk Premia in the Euro Area and the United States
by Peter Hördahla and Oreste Tristanib
We use a joint model of macroeconomic and term structure
dynamics to estimate inflation risk premia and inflation expectations
in the United States and the euro area. To sharpen our
estimation, we include in the information set macro data and
survey data on inflation and interest rate expectations at various
future horizons, as well as term structure data from both
nominal and index-linked bonds.
Our results indicate that, over the post-2004 period when
index-linked bond markets were sufficiently developed in both
monetary areas, inflation risk premia across various maturities
had strikingly similar properties in the United States and
in the euro area: their dynamics and their levels, especially
over the years until mid-2011, have remained quite close to
each other, even if premia appear to be subject to somewhat
greater high-frequency volatility in the United States.
After correcting for liquidity and inflation risk premia,
long-term inflation expectations extracted from bond prices
have remained remarkably stable at the peak of the financial
crisis and throughout the Great Recession. For the United
States, we also document a downward shift in the perceived inflation target, from approximately 3 percent until 2011 to
levels closer to 2 percent following the FOMC announcement
of a numerical long-term inflation goal.
JEL Codes: E43, E44.
Full article (PDF, 47 pages, 788 kb)
a Bank for International Settlements
b European Central Bank