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Journal of Financial Economics Vol. 127 No. 3 2018

Disagreement about inflation and the yield curve

Paul Ehling1; Michael Gallmeyer2; Christian Heyerdahl-Larsen3,4; PHILIPP K. ILLEDITSCH5

1 BI Norwegian Business School · 2 University of Virginia · 3 London School of Business and Finance · 4 London Business School · 5 Carnegie Mellon University

open access

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.

DOI
10.1016/j.jfineco.2018.01.001
Volume
127
Issue
3
Pages
459-484
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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