Extracting Deflation Probability Forecasts from Treasury Yields

Authors

Jose A. Lopez

Glenn D. Rudebusch

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2011-10 | February 1, 2011

We construct probability forecasts for episodes of price deflation (i.e., a falling price level) using yields on nominal and real U.S. Treasury bonds. The deflation probability forecasts identify two "deflation scares" during the past decade: a mild one following the 2001 recession, and a more serious one starting in late 2008 with the deepening of the financial crisis. The estimated deflation probabilities are generally consistent with those from macroeconomic models and surveys of professional forecasters, but they also provide high frequency insight into the views of financial market participants. The probabilities can also be used to price the deflation option embedded in real Treasury bonds.

Article Citation

Rudebusch, Glenn D., Jens H. E. Christensen, and Jose A. Lopez. 2011. “Extracting Deflation Probability Forecasts from Treasury Yields,” Federal Reserve Bank of San Francisco Working Paper 2011-10. Available at https://doi.org/10.24148/wp2011-10

About the Author
Jens Christensen
Jens Christensen is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Jens Christensen