Computing Long-Term Market Inflation Expectations for Countries without Inflation Expectation Markets

Petra Gerlach-Kristen, Swiss National Bank
Richhild Moessner, Bank for International Settlements
Rina Rosenblatt-Wisch, Swiss National Bank

Citation: Gerlach-Kristen, P., Moessner, R. and Rosenblatt-Wisch, R. (2018). Computing Long-Term Market Inflation Expectations for Countries without Inflation Expectation Markets. Russian Journal of Money and Finance, 77(3), pp. 23–48.
doi:10.31477/rjmf.201803.23

Abstract
Central banks monitor long-term inflation expectations closely since they reflect credibility. In this paper, we derive daily market-based domestic long-term inflation expectations for eight countries without inflation swap markets. To do so, we use foreign inflation swaps together with (1) foreign and domestic interest rate swaps assuming that purchasing power parity (PPP) and uncovered interest rate parity (UIP) hold or together with (2) spot and forward exchange rates assuming that PPP, UIP and covered interest rate parity (CIP) hold. We confirm the plausibility of our PPP-UIP and PPP-UIC-CIP measures by also applying these methods for countries with inflation swap markets. We moreover illustrate how the data can be used to answer such questions as whether inflation reacts to long-term inflation expectations, whether these expectations are well-anchored and how long-term real interest rates have moved over the past decade.

Keywords: inflation expectations, market-based inflation expectations, anchoring of inflation expectations, long-term real interest rates
JEL Codes: E31, E44, E58

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