Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153430
Authors: 
Ciccarelli, Matteo
García, Juan Angel
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 996
Abstract: 
The yield spread between nominal and inflation-linked bonds (or break-even inflation rates, BEIR) is a fundamental indicator of inflation expectations (and associated premia). This paper investigates which macroeconomic and financial variables explain BEIRs. We evaluate a large number of potential explanatory variables through Bayesian model selection techniques and document their explanatory power at different horizons. At short horizons, actual inflation dynamics is the main determinant of BEIRs. At long horizons, financial variables (i.e. term spread, bond market volatility) become increasingly relevant, but confidence and cyclical indicators remain important.
Subjects: 
Bayesian model selection
break-even inflation rates
business cycle indicators
inflation risk premia
JEL: 
C11
C52
E31
Document Type: 
Working Paper

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