Do bond markets find inflation targets credible? Evidence from five inflation-targeting countries

Young Min Kim, Kyu Ho Kang, Kook Ka

Research output: Contribution to journalArticle

Abstract

This study quantifies the inflation-targeting credibility in expectation as perceived by bond markets, measured by the posterior probability of the expected inflation falling within the target range over time. To this end, we derive an analytical inflation-expectation expression from a macro-finance arbitrage-free affine term-structure model. We then simulate its posterior distributions to account for the parameter and yield curve factor uncertainties. According to our empirical results for five inflation-targeting countries that have announced target ranges since the 1990s, the credibility in expectation varies strongly over time and reveals substantial cross-country variation. Further, the inflation risk premium tends to be small when the credibility level is high. (JEL classification: E52, G12, C58, E43)

Original languageEnglish
Pages (from-to)66-84
Number of pages19
JournalInternational Review of Economics and Finance
Volume67
DOIs
Publication statusPublished - 2020 May

Fingerprint

Bond market
Inflation target
Inflation targeting
Credibility
Arbitrage
Factors
Affine term structure models
Posterior distribution
Yield curve
Finance
Posterior probability
Empirical results
Expected inflation
JEL classification
Inflation expectations
Inflation risk premium
Uncertainty

Keywords

  • Bayesian MCMC algorithm
  • Inflation risk premium
  • Macro-finance affine term-structure model
  • Parameter uncertainty

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Do bond markets find inflation targets credible? Evidence from five inflation-targeting countries. / Kim, Young Min; Kang, Kyu Ho; Ka, Kook.

In: International Review of Economics and Finance, Vol. 67, 05.2020, p. 66-84.

Research output: Contribution to journalArticle

@article{e301fec1d28d4e10a6a9d58617794418,
title = "Do bond markets find inflation targets credible? Evidence from five inflation-targeting countries",
abstract = "This study quantifies the inflation-targeting credibility in expectation as perceived by bond markets, measured by the posterior probability of the expected inflation falling within the target range over time. To this end, we derive an analytical inflation-expectation expression from a macro-finance arbitrage-free affine term-structure model. We then simulate its posterior distributions to account for the parameter and yield curve factor uncertainties. According to our empirical results for five inflation-targeting countries that have announced target ranges since the 1990s, the credibility in expectation varies strongly over time and reveals substantial cross-country variation. Further, the inflation risk premium tends to be small when the credibility level is high. (JEL classification: E52, G12, C58, E43)",
keywords = "Bayesian MCMC algorithm, Inflation risk premium, Macro-finance affine term-structure model, Parameter uncertainty",
author = "Kim, {Young Min} and Kang, {Kyu Ho} and Kook Ka",
year = "2020",
month = "5",
doi = "10.1016/j.iref.2019.12.007",
language = "English",
volume = "67",
pages = "66--84",
journal = "International Review of Economics and Finance",
issn = "1059-0560",
publisher = "Elsevier Inc.",

}

TY - JOUR

T1 - Do bond markets find inflation targets credible? Evidence from five inflation-targeting countries

AU - Kim, Young Min

AU - Kang, Kyu Ho

AU - Ka, Kook

PY - 2020/5

Y1 - 2020/5

N2 - This study quantifies the inflation-targeting credibility in expectation as perceived by bond markets, measured by the posterior probability of the expected inflation falling within the target range over time. To this end, we derive an analytical inflation-expectation expression from a macro-finance arbitrage-free affine term-structure model. We then simulate its posterior distributions to account for the parameter and yield curve factor uncertainties. According to our empirical results for five inflation-targeting countries that have announced target ranges since the 1990s, the credibility in expectation varies strongly over time and reveals substantial cross-country variation. Further, the inflation risk premium tends to be small when the credibility level is high. (JEL classification: E52, G12, C58, E43)

AB - This study quantifies the inflation-targeting credibility in expectation as perceived by bond markets, measured by the posterior probability of the expected inflation falling within the target range over time. To this end, we derive an analytical inflation-expectation expression from a macro-finance arbitrage-free affine term-structure model. We then simulate its posterior distributions to account for the parameter and yield curve factor uncertainties. According to our empirical results for five inflation-targeting countries that have announced target ranges since the 1990s, the credibility in expectation varies strongly over time and reveals substantial cross-country variation. Further, the inflation risk premium tends to be small when the credibility level is high. (JEL classification: E52, G12, C58, E43)

KW - Bayesian MCMC algorithm

KW - Inflation risk premium

KW - Macro-finance affine term-structure model

KW - Parameter uncertainty

UR - http://www.scopus.com/inward/record.url?scp=85077700593&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85077700593&partnerID=8YFLogxK

U2 - 10.1016/j.iref.2019.12.007

DO - 10.1016/j.iref.2019.12.007

M3 - Article

AN - SCOPUS:85077700593

VL - 67

SP - 66

EP - 84

JO - International Review of Economics and Finance

JF - International Review of Economics and Finance

SN - 1059-0560

ER -