The term structure of inflation risk premia and macroeconomic dynamics

This paper estimates the size and dynamics of inflation risk premia in the euro area using information from nominal and index-linked yields. Our main result is that the inflation risk premium on long-term nominal yields is nonnegligible from an economic viewpoint. Break-even inflation rates — i.e. the difference between nominal and real yields with identical maturity — therefore represent a relatively crude approximation of inflation expectations. Break-even inflation rates are also found to contain useful information to forecast inflation and output growth, even when taking into account standard indicators such as the slope of the yield curve