Disagreement about inflation and the yield curve

Ehling, P, Gallmeyer, M, Heyerdahl-Larsen, C and Illeditsch, P (2018) Disagreement about inflation and the yield curve. Journal of Financial Economics, 127 (3). pp. 459-484. ISSN 0304-405X

Abstract

We show that inflation disagreement, not just expected inflation, has an impact on nominal interest rates. In contrast to expected inflation, which mainly affects the wedge between real and nominal yields, inflation disagreement affects nominal yields predominantly through its impact on the real side of the economy. We show theoretically and empirically that inflation disagreement raises real and nominal yields and their volatilities. Inflation disagreement is positively related to consumers’ cross-sectional consumption growth volatility and trading in fixed income securities. Calibrating our model to disagreement, inflation, and yields reproduces the economically significant impact of inflation disagreement on yield curves.

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Item Type: Article
Subject Areas: Finance
Additional Information: © 2017 Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0
Subjects: S > Speculation
I > Inflation
Date Deposited: 12 Jan 2018 12:39
Last Modified: 18 Jun 2019 02:37
URI: http://lbsresearch.london.edu/id/eprint/919
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