Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104269
Authors: 
Kajuth, Florian
Watzka, Sebastian
Year of Publication: 
2008
Series/Report no.: 
Munich Discussion Paper 2008-13
Abstract: 
We provide a critical assessment of the method used by the Cleveland Fed to correct expected inflation derived from index-linked bonds for liquidity and inflation risk premia and show how their method can be adapted to account for time-varying inflation risk premia. Furthermore, we show how sensitive the Cleveland Fed approach is to different measures of the liquidity premium. In addition we propose an alternative approach to decompose the bias in inflation expectations derived from index-linked bonds using a state-space estimation. Our results show that once one accounts for time-varying liquidity and inflation risk premia current 10-year U.S. inflation expectations are lower than estimated by the Cleveland Fed.
Subjects: 
Inflation expectations
liquidity risk premium
inflation risk premium
treasury inflation-protected securities (TIPS)
state-space model
JEL: 
E31
E52
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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