Essays on monetary policy and inflation markets

Sammanfattning: This doctoral thesis consists of three independent papers in financial economics. In these papers I explore the dynamics of inflation markets and the interaction between the real economy, the nominal economy, and monetary policy. In the first paper, my coauthor and I, study one of the most pervasive arbitrage mispricings documented in Treasury bondmarkets: the relative mispricing of Treasury Inflation-Protected Securities (TIPS). We find that the term structure of TIPS arbitrage mispricing predicts jointly inflation, and bond and equity excess returns. In the second paper, my coauthor and I, use inflation swap rates and break-even inflation rates to study how the effects of Fed’s monetary policy actions transmit to inflation markets. This exercise leads us to a useful byproduct. We find that during the period that the Fed implemented unconventional monetary policy the persistent TIPS arbitrage mispricing dropped significantly and inflation markets improved. In the final paper, I develop a theoretical framework to study the implications of endogenous inflation on the term structures of nominal yields, break-even inflation, inflation expectations, and inflationrisk premia. I use this framework to conduct monetary policy experiments and explore the effects of monetary policy stance changes on the dynamics of nominal quantities.