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Term Structures of Inflation Expectations and Real Interest Rates: The Effects of Unconventional Monetary Policy

Staff Report 502 | Published August 13, 2014

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photo of S. Boragan Aruoba

S. Boragan Aruoba

Term Structures of Inflation Expectations and Real Interest Rates: The Effects of Unconventional Monetary Policy

Abstract

Inflation expectations have recently received increased interest because of the uncertainty created by the Federal Reserve’s unprecedented reaction to the Great Recession. The effect of this reaction on the real economy is also an important topic. In this paper I use various surveys to produce a term structure of inflation expectations – inflation expectations at any horizon from 3 to 120 months – and an associated term structure of real interest rates. Inflation expectations extracted from this model track actual (ex-post) realizations of inflation quite well, and in terms of forecast accuracy they are at par with or superior to some popular alternatives obtained from financial variables. Looking at the period 2008–2013, I conclude that the unconventional policies of the Federal Reserve kept long-run inflation expectations anchored and provided a large level of monetary stimulus to the economy.