Expected Inflation, Inflation Risk Premium and the Term Structure of Macroeconomic Announcements in the Euro Area and in the United States

This paper uses the celebrated no-arbitrage affine Gaussian term structure model applied to index-linked and standard government bonds to derive expected inflation rates and the corresponding inflation risk premia, in the euro area and in the United States. After estimating the model using maximum likelihood, results also show that the model performs surprisingly well in generating a number of dynamic features of both index-linked and standard bonds. The model describes the evolution of the nominal and real term structures by using a small number of latent factors which can be interpreted as two real factors and one inflation factor; the model provides substantial information related to expected inflation and inflation risk premia in the euro area and in the United States. In the second part, the paper analyses the impact of macroeconomics news on the nominal and real term structure. Results show that nominal rates are impacted by macroeconomic news on growth, labour market and economic outlook in the United States and by news on inflation in the euro area; this preliminary results can be due to the difference in the dual mandate of the monetary authorities in the United States against the unique mandate in the euro area