Accessible Version
Tips from TIPS: Update and Discussions Accessible Data
Figure 1: Decomposition of inflation compensation
This figure shows decompositions of 10-year and 5-to-10-year TIPS inflation compensation (black lines) into inflation expectations (red lines), inflation risk premiums (blue lines), and TIPS liquidity premiums (the green lines), from 1999 till the beginning of 2019. The upper panel chart shows the decomposition for the 10-year inflation compensation. The line for inflation compensation shows a fair amount of fluctuation over time around 2 percent level, and a notable decline and rebound around the end of 2008 and beginning of 2009. The line for inflation expectations shows some variation over time around a level slightly above 2 percent, but shows less variation than the line for inflation compensation. The line for inflation risk premium shows a time series that fluctuate near zero level. The line for TIPS liquidity premium shows a series that fluctuated around 1 percent level until 2003, declined to about zero level by 2005, sharply peaked around 2008-9, and then fluctuated around about zero level afterwards. The lower panel shows the decomposition for the 5-to-10-year inflation compensation. The qualitative behaviors of the four lines are similar to those in the upper panel. The lower panel line for inflation compensation shows a less dramatic decline and rebound around the 2008-9 than in the upper panel, and the spike in TIPS liquidity premium line during 2008-9 in the lower panel is somewhat less pronounced than in the lower panel.
Source: D'Amico, Kim, and Wei (2018), updated by authors. Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: March 2001-November 2001, and December 2007-June 2009.
Figure 2: Comovement between 5-to-10-year TIPS inflation compensation and market sentiment proxies or oil prices
This figure shows the comovement between 5-to-10-year TIPS inflation compensation and market sentiment proxies or oil prices from 1999 till the beginning of 2019. All series have been standardized, so they are vertically centered around zero. The upper panel shows two lines corresponding to the time series of 5-to-10-year inflation compensation and high-yield spread. Both series fluctuate over time, and often in opposite directions. For example, when the series for the high yield spread peaked around the beginning of 2009, the inflation compensation cratered, and when the high yield spread increased over 2014H2 and 2015, the inflation compensation declined. Mostly recently, in late 2008 the high yield spread rose, while inflation compensation declined.
The middle panel shows two lines corresponding to the time series of 5-to-10-year inflation compensation and VIX. The series for inflation compensation is the same as that appeared in the upper panel. Both inflation compensation and VIX series fluctuate over time, and often in opposite directions. For example, when the series for VIX peaked around the beginning of 2009, the inflation compensation cratered, and mostly recently, in late 2008 the high yield spread rose, while inflation compensation declined. That said, the visual impression of negative correlation between inflation compensation and VIX is not as strong as the negative correlation of inflation compensation and high yield in the upper panel.
The lower panel shows two lines corresponding to the time series of 5-to-10-year inflation compensation and log oil price. The series for inflation compensation is the same as that appeared in the upper and middle panels. The series for log oil price show a fairly steady rise till 2007, thus do not look correlated with the series for inflation compensation. However, starting around 2014, the two series look positively correlated, both falling notably in 2014H2 and 2015, and also in late 2018.
Note: All figures have been standardized, i.e., they have been subtracted by the mean and then divided by the standard deviation. The inflation compensation series in (c) is identical to the series in (a) and (b), but has been plotted with a different vertical scale. Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: March 2001-November 2001, and December 2007-June 2009.
Source: Bloomberg; Board staff estimates.
Figure 3: Term structure model estimates of 5-to-10-year-ahead inflation expectations
This figure plots five lines representing the time series of model-implied 5-to-10-year inflation expectations from the updated DKW model, AACMY model, ABC model, CLR model, and HPR model. The series based on updated DKW, ABC, and HPR models start in early or mid 1980s and show a visible downward trend, from about 3.5 to 4 percent level in mid 1980s to about 2 to 2.5 percent level in 2018. The series based on AACMY model start around 1999 and show almost no variation around 2 percent level, and the series based on the CLR model start around 2003 and also show little fluctuation around 2 percent level. Figure 3 also shows circles representing the 5-to-10-year inflation forecasts from Blue Chip Financial Forecast (BCFF) survey. This BCFF inflation forecast also trended down over time, similar to the behavior of the estimates from the updated DKW model, ABC model, and HPR model, and are currently at a level slightly above 2 percent.
Note: BCFF is the (approximately) 5-to-10-year CPI inflation forecast from the semi-annual Blue Chip Financial Forecasts survey. The ABC estimate is reported at a quarterly frequency. The HPR estimate is reported at a monthly frequency. The AACMY, CLR, and Updated DKW estimates are reported at a daily frequency. Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.
Source: Abrahams, Adrian, Crump, Moench, and Yu (2016); Ajello, Benzoni, and Chyruk (2012); Christensen, Lopez, and Rudebusch (2018); Haubrich, Pennacchi, and Ritchken (2012); Blue Chip Financial Forecasts; D'Amico, Kim, and Wei (2018), updated by authors.
Figure 4: Estimates of rLR from term structure models
This figure plots the estimates of long-run equilibrium real rate from six term structure models. The Updated DKW estimate, plotted daily since 1983 in black, declines from above 3 percent in early 1980s to close to 1 percent now. The HPR estimate, plotted monthly since 1983 in blue, shows a larger decline from 4-5% in early 1980s to about -1 percent in 2012, before rebounding to 0 percent now. The ABC estimate, plotted quarterly since 1985 in green, declines from about 4 percent to around 0 percent now. The CR estimate, plotted monthly since 1998 in red, shows a decline from around 2 percent in early 2000 to slightly below 1 percent now. The AACMY estimate, plotted daily since 1999 in yellow, is relatively stable around 0 percent. The CLR estimate, plotted daily since 2003 in purple, is also relatively stable around 1.5 percent.
Note: The AACMY, CLR, and Updated DKW estimates are reported at a daily frequency. The CR and HPR models are reported at a monthly frequency. The ABC model is reported at a quarterly frequency. Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.
Source: Abrahams, Adrian, Crump, Moench, and Yu (2016); Ajello, Benzoni, and Chyruk (2012); Christensen, Lopez, and Rudebusch (2010); Christensen and Rudebusch (2017); Haubrich, Pennacchi, and Ritchken (2012); D'Amico, Kim, and Wei (2018) updated by authors.
Figure 5: Estimates of rLR from macro models
This figure plots the estimates of long-run equilibrium real rate from six macro models, including DNGGT (in black), HLW (in red), JM (in blue), Kiley (in green), LM (in yellow), and LVG (in purple). All model estimates are in quarterly frequency and are filtered estimates (as opposed to smoothed estimates). The DNGGT estimate starts in 2000, while all other model estimates start in 1983. All estimates fluctuate between 2 percent and 4 percent before 2008 and, with the exception of the JM estimate, show a pronounced decline around the 2008-09 financial crisis. The current range of estimates is around 0.5 percent to 2 percent.
Note: All model estimates are in quarterly frequency and are filtered estimates (as opposed to smoothed estimates). Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.
Source: Del Negro et al. (2017); Holston, Laubach, and Williams (2017); Johannsen and Mertens (2016); Kiley (2015); Lewis and Vazquez-Grande (2017); Lubik and Matthes (2015).
Figure 6: Estimates of rLR from DKW, macro models, and BCFF survey
This figure plots estimates of long-run equilibrium real rate from the updated DKW model (in black) and based on the BCFF survey (in red circles), against the backdrop of the range of macro model-based estimates shown in Figure 5 (the blue shaded area). The updated DKW measure has stayed within the range of macro model estimates since the crisis, but lie at or below the bottom of the range for most of the pre-crisis years, and indicates a gradual downward drift in the long-run equilibrium real rate over the past couple of decades. The updated DWK measure is close to the survey-implied measure in recent years but exhibits somewhat less variability over the longer span of time since mid-1980s.
Note: BCFF is the neutral real interest rate implied by the Blue Chip Financial Forecasts Survey. It is calculated as the difference between the 5-to-10-year expected Federal Funds Rate minus the 5-to-10-year expected CPI inflation. The blue shaded region shows the range of macro model estimates in Figure 5. Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.
Source: D'Amico, Kim, and Wei (2018) updated by authors; Blue Chip Financial Forecasts; Del Negro et al. (2017); Holston, Laubach, and Williams (2017); Johannsen and Mertens (2016); Kiley (2015); Lewis and Vazquez-Grande (2017); Lubik and Matthes (2015).