2024
Research
BPEA | Spring 2009Understanding Inflation-Indexed Bond Markets
Luis M. Viciera,
LMV
Luis M. Viciera
Harvard University
Robert J. Shiller, and
Robert J. Shiller
Sterling Professor of Economics
- Yale University
John Y. Campbell
JYC
John Y. Campbell
Harvard University
Discussants:
Frederic S. Mishkin and
Jonathan H. Wright
JHW
Jonathan H. Wright
Johns Hopkins University
![Robert J. Shiller](https://www.brookings.edu/wp-content/uploads/2016/06/Shiller.jpg?quality=75&w=186)
Spring 2009
This paper explores the history of inflation-indexed bond markets
in the United States and the United Kingdom. It documents a massive
decline in long-term real interest rates from the 1990s until 2008, followed by
a sudden spike during the financial crisis of 2008. Breakeven inflation rates,
calculated from inflation-indexed and nominal government bond yields, were
stable from 2003 until the fall of 2008, when they showed dramatic declines.
The paper asks to what extent short-term real interest rates, bond risks, and
liquidity explain the trends before 2008 and the unusual developments that
followed. Low yields and high short-term volatility of returns do not invalidate
the basic case for inflation-indexed bonds, which is that they provide a safe
asset for long-term investors. Governments should expect inflation-indexed
bonds to be a relatively cheap form of debt financing in the future, even though
they have offered high returns over the past decade.