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September 2016 issue
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Ramos-Francia
Altavilla, Giannone, Lenza
Bluwstein, Canova
Wright
Boneva, Cloyne, Weale, Wieladek
Nagel
Arce, Hurtado, Thomas
Nuguer
Kaszab
Bayoumi
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Long-Run Inflation Uncertainty

by Stefan Nagel
University of Michigan, NBER, and CEPR

Abstract

In this commentary I argue that option price data offer useful insights into the long-run macroeconomic uncertainty perceived by investors. Data on inflation options in the United States show substantial dispersion in the risk-neutral distribution of long-run inflation rates. This may indicate that substantial uncertainty about the inflation target still exists. However, I argue that a high dispersion in the risk-neutral distribution could also reflect disagreement among investors who are confident in their own forecasts and do not necessarily perceive a high degree of subjective uncertainty. Disagreement could potentially reconcile the relative stability of inflation in recent years with the substantial dispersion in the risk-neutral distribution of long-run inflation and in survey forecasts of long inflation.

JEL Codes: E31, E44, G13.

 
Full article (PDF, 11 pages, 360 kb)