Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/340186 
Year of Publication: 
2026
Series/Report no.: 
SAFE Working Paper No. 477
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
Abstract: 
We identify desirable/undesirable inflation outcomes under subjective beliefs by comparing surveybased and risk-adjusted distributions of inflation. Intuitively, investors dislike inflation at both extremes, preferring a range in the middle. This "good inflation" region, which investors associate with lower-than-average marginal utility, varies substantially over time in position and width, revealing time-varying preferences across inflation ranges. Different ranges contribute to the inflation risk premium with mixed signs, offsetting each other and often masking important insights into the pricing of inflation risk. We rationalize these empirical patterns using a model where investors learn and update beliefs about hidden deflationary and inflationary recession states.
Subjects: 
Inflation Options
Learning
Subjective Beliefs
Density Forecasts
Good/Bad Inflation Ranges
Document Type: 
Working Paper

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