Working Paper

Deriving inflation expectations from nominal and inflation-indexed Treasury yields

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: Government securities; Treasury notes; Inflation (Finance);

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2000

Number: 2000-33