Template-Type: ReDIF-Paper 1.0
Author-Name: Sirio Aramonte
Author-X-Name-First: Sirio
Author-X-Name-Last: Aramonte
Title: Inflation risk and the labor market: beneath the surface of a flat Phillips curve
Abstract: While the Phillips curve appeared quiescent after the Great Financial Crisis (GFC), inflation risk, as gauged from option prices, remained sensitive to employment dynamics. Using Phillips-curve regressions centered on option-implied moments, I show that, in tight labor markets, a fall in the unemployment gap raises the risk that inflation overshoots expectations – even if realized and expected inflation remain stable. In tight labor markets, implied moments convey valuable information, as shown by their ability to anticipate future patterns in inflation breakevens and wage growth. The usefulness of inflation options in assessing risk, despite their illiquidity, is rooted in reputational incentives that dealers have to disseminate accurate quotes.
Length: 38 pages
Creation-Date: 2022-11
File-URL: https://www.bis.org/publ/work1054.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1054.htm
File-Format: text/html
Number: 1054
Keywords: inflation expectations, inflation risk, inflation options, labor market
Classification-JEL: G12, G14, G23
Handle: RePEc:bis:biswps:1054