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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Deriving Inflation Expectations from Nominal and Inflation-Indexed Treasury Yields
Brian Sack

Abstract: This paper derives a measure of inflation compensation from the yields of a Treasury inflation-indexed security and a portfolio of STRIPS that has similar liquidity and duration as the indexed security. This measure can be used as a proxy for inflation expectations if the inflation risk premium is small. The calculated measure suggests that the rate of inflation expected over the next ten years fell from just under 3% in mid-1997 to just under 1 3/4% by early 1999, before rising back to about 2 1/2% by the beginning of 2000. This variation is more extensive than would have been expected from a simple model of inflation dynamics or from a survey measure of long-run inflation expectations.

Keywords: Inflation-indexed debt; inflation expectations; treasury market

Full paper (133 KB PDF)

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Last update: June 30, 2000