Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297048 
Year of Publication: 
2024
Series/Report no.: 
Danmarks Nationalbank Working Papers No. 201
Publisher: 
Danmarks Nationalbank, Copenhagen
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 inflationlinked 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.
Subjects: 
Financial markets
Inflation and price development
Models
Monetary policy
Inflation-linked swaps
affine term structure model
inflation expectations
JEL: 
E31
E44
E52
Document Type: 
Working Paper

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