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Evidence on inflation expectations from Canadian real return bonds

 
Paper:ewp-mac/0312004
From:    
Date: Fri, 5 Dec 2003 10:35:19 -0600

Abstract:
Starting with the UK in 1981, many of the industrialized countries have issued long-term bonds whose principal value is indexed to the rate of inflation. One of the benefits that economists predicted from issuing such bonds is that the difference between the yield on indexed and nominal bonds would be an indicator of the market’s expectations of inflation. This could be a useful guide for central banks in judging the success of their monetary policy in stabilizing the inflation rate. This paper examines the data from Canada, which began issuing indexed (“real return”) bonds in 1991. It is found that it is possible to explain the relationship between real and nominal bonds with very small residuals, using a moving average of historical inflation and the US bond yield as explanatory variables. The implication is that expectations in the nominal bond market are adaptive rather than forward looking. Therefore, while we are able to infer the market’s expectations of inflation with a high degree of precision, this is not actually very useful as a guide to monetary policy or predicting future inflation.

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EconWPA began as a conversation between Bob Parks and Larry Blume on January 28, 1993. I located Paul Ginsparg's archive (then xxx.lanl.gov) and he graciously installed his software on a Sun Sparc system which was supporting the department of economics email and computation. EconWPA began accepting papers July 1, 1993 and had ftp, email, gopher and web interfaces. The web interface for submissions was engineered into existence in July 1995. A complete and catastrophic machine failure in 1999 caused the loss of EconWPA's email new paper announcment service at which time there were over 15,000 subscriptions with over 8,000 unique email addresses.

In 2005, Arts and Sciences commandeered the computing services that I had provided to the Department of Economics since 1987. Some might say that the department was sold out, others would (erroneously) claim that centralization is efficient, and still others would claim that I have few marketing skills.

I was told that I could keep operating EconWPA (as well as many other services including rfe.wustl.edu, barnett.wustl.edu, and three RePEc servers) but I would receive no support (hardware, software, or anthing else) and (as had been the case) no compensation. At that point, given the apparent low valuation of my activities by the department, and university, it made no sense for me to continue operating EconWPA or other services.

Thanks to all who have supported EconWPA in the past.

A Chinese curse states May you live in intersting times. I have. Bob Parks - Jan 2006