Article ID Journal Published Year Pages File Type
983413 The Quarterly Review of Economics and Finance 2011 11 Pages PDF
Abstract

We propose a novel method to correct break-even inflation rates derived from index-linked bonds for liquidity and inflation risk premia without resorting to survey based measures. In a state-space framework the difference between break-even inflation rates and unobserved true inflation expectation is explained by measures of time-varying liquidity and inflation risk premia. Our results have better forecasting performance for the average annual inflation rate over the following 10 years than raw break-even rates and the Survey of Professional Forecasters.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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