Search Results
Working Paper
The Role of Inflation Perceptions in Consumer Inflation Expectations: Evidence from the Euro Area
Using data on euro-area household inflation forecasts from the European Commission Consumer Survey, we show that households' perceptions of recent price changes play a key role in the formation of their inflation expectations. Such a relationship remains robust when we account for specific inflation components, household characteristics, and macroeconomic conditions, even though the perceptions-expectations relationship is heterogeneous across countries. These results highlight the importance of perceptions about inflation for the conduct of monetary policy.
Discussion Paper
Has the Inflation Risk Premium Fallen? Is it Now Negative?
In this note, we examine the theoretical determinants of one important component of inflation compensation, the inflation risk premium, and argue that a secular decline in the inflation risk premium may be responsible for a substantial portion of the decline in inflation compensation in recent years.
Working Paper
Habit formation heterogeneity: Implications for aggregate asset pricing
We study the asset pricing implications of a general equilibrium Lucas endowment economy inhabited by two agents with habit formation preferences. Preferences are modeled either as internal or external habits. We allow for agents' heterogeneity in relative risk aversion and habit strength. We explicitly compute aggregate prices, such as equity premium, equity volatility, Sharpe ratio, interest rate volatility, and asset holdings for both types of preferences. Equilibrium quantities are computed using a recently developed algorithm of Dumas and Lyasoff (2011), which is refined to capture time ...
Working Paper
Inflation risk premium: evidence from the TIPS market
``Inflation-indexed securities would appear to be the most direct source of information about inflation expectations and real interest rates" (Bernanke, 2004). In this paper we study the term structure of real interest rates, expected inflation and inflation risk premia using data on prices of Treasury Inflation Protected Securities (TIPS) over the period 2000-2008. The approach we use to estimate inflation risk premium is arbitrage free, largely model free, and easy to implement. We also make distinction between TIPS yields and real yields and take into account explicitly the three-month ...
Working Paper
The information content of the embedded deflation pption in TIPS
In this paper we estimate the value of the embedded option in U.S. Treasury Inflation Protected Securities (TIPS). The option value exhibits significant time variation that is correlated with periods of deflationary expectations. We use our estimated option values to construct an embedded option price index and an embedded option return index. We then use our embedded option indices as independent variables and examine their statistical and economic significance for explaining the future inflation rate. In most of our regressions, our embedded option return index is significant even in the ...
Working Paper
Term Structure of Interest Rates with Short-run and Long-run Risks
Bond returns are time-varying and predictable. What economic forces drive this variation? To answer this long-standing question, we propose a consumption-based model with recursive preferences, long-run risks, and inflation non-neutrality. Our model offers two important insights. First, our model matches well the post-1990 nominal upward-sloping U.S. Treasury yield curve. Second, consistent with our model's implication, variance risk premium based on the U.S. interest rate derivatives data emerges as a strong predictor for short-horizon Treasury excess returns, above and beyond the predictive ...