1. Very interesting, thanks, I think this is the first or second most interesting comment we’ve gotten.
2. I see that you are suggesting this as a possibility, rather than a likelihood, but I’ll note at least for other readers that—I would bet against this occurring, given central banks’ somewhat successful record at maintaining stable inflation and desire to avoid deflation. But it’s possible!
3. Also, I don’t know if inflation-linked bonds in the other countries we sample—UK/Canada/Australia—have the deflation floor. Maybe they avoid this issue.
4. Long-term inflation swaps (or better yet, options) could test this hypothesis! i.e. by showing the market’s expectation of future inflation (or the full [risk-neutral] distribution, with options).
1. Very interesting, thanks, I think this is the first or second most interesting comment we’ve gotten.
2. I see that you are suggesting this as a possibility, rather than a likelihood, but I’ll note at least for other readers that—I would bet against this occurring, given central banks’ somewhat successful record at maintaining stable inflation and desire to avoid deflation. But it’s possible!
3. Also, I don’t know if inflation-linked bonds in the other countries we sample—UK/Canada/Australia—have the deflation floor. Maybe they avoid this issue.
4. Long-term inflation swaps (or better yet, options) could test this hypothesis! i.e. by showing the market’s expectation of future inflation (or the full [risk-neutral] distribution, with options).
It appears the UK’s index-linked gilts, at least, don’t have this structural issue.
See “redemption payments” on page 6 of this document, or put in a sufficiently large negative inflation assumption here.