MARKET BASED AND MODEL BASED INFLATION FORECASTS
MARKET BASED AND MODEL BASED INFLATION FORECASTS
Gerzensee, February 2026
Carlo A.Favero
The objective of this section of the course is to provide an understanding of market-based and model-based inflation forecasts by analyzing their meaning their properties and their construction. Empirical sections in R will allow the participants to apply the methodology illustrated in the lectures on data. In the afternoon of the first day of lectures course participants will be divided in groups and a forecasting competition will be organized on a common database with target variables inflation and interest rates. Groups will be asked to give a brief presentation of their results on the morning of the second day of lectures. In the second day of lectures replication of papers relevant for the understanding of market based and model-based inflation analysis will be assinged to groups to be discussed in the morning of the third day of lectures.
Material: Slides Lectures 1-2, Slides Lectures 3-4, a quarterly data-set, a monthly data-set, an introductory R code for forecasting, with utilities, an R code with a proposal for Assignment 1, an R code to replicate Pfluger-Viceira, a replication package of Bernanke-Blinder in R
SYLLABUS
1. Forecasting Inflation: The different approaches
Survey-based, Asset Price based, and Model-based analysis of Inflation. An Overview
The basic of forecasting time series with trend and cycles
Asset Prices with Time-Varying Expected Returns
Physical and Risk-Neutral probabilities
Bond Returns, YTM and Risk Premia
Modelling the Term Structure and Inflation
Model-based Analysis of Inflation.
Ang, A., G. Bekaert, and M. Wei (2007): “Do macro variables, asset markets or surveys forecast inflation better?,” Journal of Monetary Economics, 54, 11631212
Bernanke B., O.Blanchard(2023), What Caused the U.S. Pandemic-Era Inflation?
Clathworthy, Peel and Pope(2005) “Are Analysts Loss functions asymmetric?”
Cavallo A. and R.Rigobon(2016) "The Billion Prices Project: Using Online Prices for Measurement and Research", Journal of Economic Perspectives,30,2,151-178
www.thebillionpricesproject.com, www.trueflation.com
Campbell J.Y(2017) Financial Decisions and Markets, Chapter 8
Campbell,J.,and Shiller,R. "Cointegration and Tests of Present Value Models" J.P.E. 95 (1987) 1062-1088
Cochrane, JH. 2005. Asset Pricing, revised ed. Princeton University Press, Princeton,
Diebold Francis (2015) Forecasting ,http://www.ssc.upenn.edu/~fdiebold/Textbooks.html
Grothe M. and A.Meyler(2014) Inflation Forecasts: are Market based and Survey Based measures informative?
ECB Economic Bullettin(2018) Interpreting Recent Developments in Market Based Indicators of Longer Term Inflation Expectations
Favero, Carlo A, Alessandro Melone, and Andrea Tamoni (2022) “Monetary policy and bond prices with drifting equilibrium rates,” Journal of Financial and Quantitative Analysis, 1–26
2. Market-based Forecasts of Inflation:The Instruments
Inflation indexed bonds
Inflation Swaps
The Option-Implied distribution of future inflation
Devlin W. and D. Patwardhan(2012) “Measuring Market Inflation Expectations” available at http://www.treasury.gov.au/PublicationsAndMedia/Publications/2012/EconomicRoundupIssue2/Report/Measuringmarketinflationexpectations
ECB Economic Bullettin(2018) Interpreting Recent Developments in Market Based Indicators of Longer Term Inflation Expectations
Haubrich, Joseph G., George Pennacchi, and Peter Ritchken. 2011. “Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps.” Federal Reserve Bank of Cleveland, Working Paper No. 11-07.https://doi.org/10.26509/frbc-wp-201107
Hurd and Rellen(2006) “New Information from Inflation Swaps and Index-Linked Bonds” Bank of England Quarterly Bulletin
Kitsul Y. and JH Wright(2012) The Economics of Options-Implied Inflation Probability Density Functions, NBER WP 18195
3.Risk Premia and the Inflation Risk Premium
The risk premia in nominal bonds, real bonds and break-even inflation rates
Break-even inflation and inflation expectations
Campbell J.Y(2017) Financial Decisions and Markets, Chapter 8
Cochrane, JH and M Piazzesi. 2005. Bond Risk Premia. American Economic Review 95, 138—160
Cochrane J. and M.Piazzesi(2008) "Decomposing the Yield Curve"
Gürkaynak, RS, B Sack, and JH Wright. 2010. The TIPS Yield Curve and Inflation Compensation. American Economic Journal: Macroeconomics 2(1):70—92
Pflueger C.E. and L.Viceira “Inflation Indexed Bonds and the Expectations Hypothesis”
Pflueger C.E. and L.Viceira "Return Predictability in The Treasury Market: Real Rates, Inflation and Liquidity"
4.The Post-Covid Inflationary Episode, Model-Based Analysis
Understanding the Causes of Inflation
The Bernanke-Blinder Model
Empirical Model Specification
Model Simulation
Bernanke B., O.Blanchard(2023), What Caused the U.S. Pandemic-Era Inflation?
Giannone, Domenico; Primiceri, Giorgio. The drivers of post-pandemic inflation. National Bureau of Economic Research, 2024.
Last change 12/01/2026