Kasper Jørgensen
- 25 April 2024
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 3, 2024Details
- Abstract
- When long-term inflation-linked swap (ILS) rates for the euro area peaked in summer 2023, some observers expressed concerns that ILS rates reflected not only inflation compensation, but also non-fundamental “technical” factors. Such factors potentially reduced the usefulness of ILS rates in terms of gauging inflation expectations and risks. This box contributes to that discussion using a novel econometric approach, suggesting that there is, on average, little scope for technical factors to affect ILS rates. At the same time, the results also suggest that the signal from ILS rates may have been distorted somewhat during episodes of extremely high market volatility (e.g. the global financial crisis, the start of the COVID-19 pandemic and the aftermath of the Russian invasion of Ukraine). However, those distortions were short-lived and mainly affected short-term ILS rates, while longer maturities appear to have been less affected.
- JEL Code
- E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing
- 14 February 2024
- WORKING PAPER SERIES - No. 2908Details
- Abstract
- We build a novel term structure model for pricing synthetic euro area core inflation-linked swaps, a hypothetical swap contract indexed to core inflation. Our approach relies on a term structure model of traded headline inflation-linked swap rates, which we assume span core inflation. The model provides estimates of market-based expectations for core inflation, as well as core inflation risk premia, at daily frequency, whereas core inflation expectations from surveys or macroeconomic projections are typically only available monthly or quarterly. We find that core inflation-linked swap rates are generally less volatile than headline inflation linked swap rates and that market participants expected core inflation to be substantially more persistent than headline inflation following the 2022 energy price spike. Using an event-study methodology, we also find that monetary policy shocks significantly lower core inflation expectations.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy