Keywords: Inflation-indexed debt; inflation expectations; treasury market
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.
Full paper (133 KB PDF)
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Last update: June 30, 2000