skip to main content
HSS Home  /  Research  /  Social Sciences Research  /  Working Papers  /  Information Flow and Expected Inflation: an Empirical Analysis
Information Flow and Expected Inflation: an Empirical Analysis
Paper Number: 1413
Date: 12/22/2015
Authors:
Abstract:

This paper begins by ranking the absolute value of changes in the 10-year breakeven inflation (BEI) calculated using 10-year Treasury notes and 10-year TIPS. Next, a news search is conducted to determine what inflation related information was released on days when the change in the BEI was greatest. The goal of the analysis is not only to see what information is associated with large changes in the BEI, but also to gain insight into the extent to which market participants accept the three competing theories of price determination: the classic monetary theory, the fiscal theory, and a "Keynesian" model that combines central bank setting of interest rates with the Philips curve. I find that there was no mention of the money supply, the demand for money, or the rate of monetary growth on any of the days on which there was a large change in the BEI. Further, I find that there was only one mention of the impact of government debt on a day where the BEI changed substantially. In comparison, there were 53 news items on large change days that either explicitly discussed Federal Reserve policy regarding interest rates or focused on the interaction between Fed policy, economic activity and expected inflation. This suggests that market participants accept the "Keynesian" model of price determination.

Paper Length: 19
Paper: SSWP1413.pdf