Macro-JI Seminar - Ricardo Reis

Abstract: 

Over the last decade, a large swap market has emerged where inflation risk is traded. The prices from these markets are closely watched, widely used, and have a strong influence on monetary policy. Using transaction data from this market, we show that: (i) in the long horizon market, pension funds buy and hold inflation insurance from banks, while (ii) in the short horizon market, informed traders are very active trading with banks, while pension funds are absent. Using a model of portfolio choice that incorporates these features, we propose an empirical strategy to identify the demand for inflation risk from different groups of agents. Estimating the model on daily data provides new estimates of the response of market-based measures of expected inflation to shocks to fundamentals or to frictions, of the liquidity premia in expected inflation, and of what moved UK markets during September of 2022.