NBB Working Paper, 2024, 446: Macroeconomic drivers of inflation expectations and inflation risk premia

We propose a new model to decompose inflation swaps into genuine inflation expectations and risk premiums. We develop a no-arbitrage term structure model with stochastic endpoints, separating macroeconomic variables into transitory parts and long-run, economically grounded determinants, such as the equilibrium real interest rate and the inflation target. Our estimations deliver new insights into how macroeconomic variables affect market-based inflatio…

We propose a new model to decompose inflation swaps into genuine inflation expectations and risk premiums. We develop a no-arbitrage term structure model with stochastic endpoints, separating macroeconomic variables into transitory parts and long-run, economically grounded determinants, such as the equilibrium real interest rate and the inflation target. Our estimations deliver new insights into how macroeconomic variables affect market-based inflation expectation measures.