Working Paper Series no. 220: Macroeconomic Surprises and the Inflation Compensation Curve in the Euro Area

Abstract

Using daily data stemming from inflation-indexed markets, we analyse the effects of numerous macroeconomic surprises on inflation compensation data - the sum of inflation expectations, risk and liquidity premia - in the euro area between 2 January 2004 and 31 December 2007. Our results suggest that when gauging short and medium-term inflation compensations, market operators are sensitive to surprises related to real activity and prices. Interestingly, oil futures prices tend to impact at some point on the short- and medium-ends of the inflation compensation curve. Notwithstanding, long-term inflation compensations remain generally unresponsive to macroeconomic surprises, attesting the high ECB's credibility.

Jérôme Coffinet and Sébastien Frappa
July 2008

Classification JEL : E31, E44, E58.

Keywords : Inflation Compensation, Macroeconomic Surprise, Eurosystem.