Modeling the dynamics of inflation compensation

• Published in: Journal of empirical finance Vol. 17; no. 1; pp. 157 - 167
• Main Authors: Jochmann, Markus, Koop, Gary, Potter, Simon M.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 2010; Elsevier
• Series: Journal of Empirical Finance
• Subjects: Bayesian; Inflation compensation; Inflation compensation Bayesian Nonlinear time series State space model; Inflation expectations; Inflation rate; Nonlinear time series; State space model; Term structure; Nonlinear time series; E31; C11; Bayesian; G12; E58; State space model; G14; Inflation compensation
• ISSN: 0927-5398; 1879-1727
• DOI: 10.1016/j.jempfin.2009.08.002

This paper investigates the relationship between short-term and long-term inflation expectations using daily data on inflation compensation derived from the term structure of real and nominal interest rates. We use a flexible econometric model which allows us to uncover this relationship in a data-based manner. We relate our findings to the issue of whether inflation expectations are anchored, unmoored or contained. Our empirical results indicate no support for either unmoored or firmly anchored inflation expectations. Most evidence indicates that inflation expectations are contained.