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In this paper, we establish a market model for the term structure of forward inflation rates based on the risk-neutral dynamics of nominal and real zero-coupon bonds. Under the market model, we can price inflation caplets as well as inflation swaptions with a formula similar to the Black's formula, thus justify the current market practice. We demonstrate how to further extend the market model to cope with volatility …
Decision-focused learning (DFL) is attractive for portfolio optimization because it trains predictors according to downstream decision quality rather than prediction accuracy alone. However, SPO(Smart, Predict then Optimize surrogate)-based DFL may produce inflated return signals and unstable portfolio reallocations. This study provides a KKT-based interpretation showing that portfolio decisions can be viewed as rank…
This paper uses new and recently introduced mathematical techniques to undertake a data-driven study on the systemic nature of global inflation. We start by investigating country CPI inflation over the past 70 years. There, we highlight the systemic nature of global inflation with a judicious application of eigenvalue analysis and determine which countries exhibit most "centrality" with an inner-product based optimiz…
Over the last decade, the foreign exchange derivatives market has witnessed a collapse of covered interest parity (CIP). Not only does this collapse give rise to large deviations from CIP, it has unlocked a stream of exploitable arbitrage opportunities across currencies. In this paper, we introduce two new factors – inflation differential and relative economic performance – as potential drivers of deviations from CIP…
We develop a model to price inflation and interest rates derivatives using continuous-time dynamics that have some links with macroeconomic monetary DSGE models equipped with a Taylor rule: in particular, the reaction function of the central bank, the bond market liquidity, inflation and growth expectations play an important role. The model can explain the effects of non-standard monetary policies (like quantitative …
Using introduced concept of the exchange and inflation rates adequacy, the relevance of them to the determining factors is found. We established close positive relation between hryvnia / dollar exchange and inflation rates, fiscal deficit, price level of energy sources, and money supply. On this basis, we give proposals for state macroeconomic policy to stabilize Ukrainian economy.
We propose a new model for the joint evolution of the European inflation rate, the European Central Bank official interest rate and the short-term interest rate, in a stochastic, continuous time setting. We derive the valuation equation for a contingent claim and show that it has a unique solution. The contingent claim payoff may depend on all three economic factors of the model and the discount factor is allowed to …
Monthly disaggregated US data from 1978 to 2016 reveals that exposure to news on inflation and monetary policy helps to explain inflation expectations. This remains true when controlling for household personal characteristics, perceptions of government policy effectiveness, future interest rates and unemployment expectations, and sentiment. We find an asymmetric impact of news on inflation and monetary policy after 1…
In this paper, we are interested to focus on the critical periods in the economy which are characterized by large fluctuations in macroeconomic indicators. To capture unusual and large fluctuations of inflation and unemployment, we concentrate on the non-Gaussianity of their distributions. To this aim, by using the coupled multifractal approach, we analyze US data for a period of 70 years from 1948 until 2018 and mea…
An extension of the nonlinear feedback (NLF) formalism to describe regimes of hyper- and high-inflation in economy is proposed in the present work. In the NLF model the consumer price index (CPI) exhibits a finite time singularity of the type $1/(t_c -t)^{(1- β)/β}$, with $β>0$, predicting a blow up of the economy at a critical time $t_c$. However, this model fails in determining $t_c$ in the case of weak hyperinflat…
Interest rate market models, like the LIBOR market model, have the advantage that the basic model quantities are directly observable in financial markets. Inflation market models extend this approach to inflation markets, where zero-coupon and year-on-year inflation-indexed swaps are the basic observable products. For inflation market models considered so far closed formulas exist for only one type of swap, but not f…
We re-estimate statistical properties and predictive power of a set of Phillips curves, which are expressed as linear and lagged relationships between the rates of inflation, unemployment, and change in labour force. For France, several relationships were estimated eight years ago. The change rate of labour force was used as a driving force of inflation and unemployment within the Phillips curve framework. The set of…
We model the rate of inflation and unemployment in Austria since the early 1960s within the Phillips/Fisher framework. The change in labour force is the driving force representing economic activity in the Phillips curve. For Austria, this macroeconomic variable was first tested as a predictor of inflation and unemployment in 2005 with the involved time series ended in 2003. Here we extend all series by nine new readi…
The evolution of the rate of price inflation and unemployment in Japan has been modeled within the Phillips curve framework. As an extension to the Phillips curve, we represent both variables as linear functions of the change rate of labor force. All models were first estimated in 2005 for the period between 1980 and 2003. Here we update these original models with data through 2012. The revisited models accurately de…
An empirical model is presented linking inflation and unemployment rate to the change in the level of labour force in Switzerland. The involved variables are found to be cointegrated and we estimate lagged linear deterministic relationships using the method of cumulative curves, a simplified version of the 1D Boundary Elements Method. The model yields very accurate predictions of the inflation rate on a three year ho…
The evolution of inflation, p(t), and unemployment, UE(t), in Japan has been modeled. Both variables were represented as linear functions of the change rate of labor force, dLF/LF. These models provide an accurate description of disinflation in the 1990s and a deflationary period in the 2000s. In Japan, there exists a statistically reliable (R2=0.68) Phillips curve, which is characterized by a negative relation betwe…
Using an analog of the boundary element method in engineering and science, we analyze and model unemployment rate in Austria, Italy, the Netherlands, Sweden, Switzerland, and the United States as a function of inflation and the change in labor force. Originally, the model linking unemployment to inflation and labor force was developed and successfully tested for Austria, Canada, France, Germany, Japan, and the United…
A linear and lagged relationship between inflation, unemployment and labor force change rate, p(t)=A0UE(t-t0)+A1dLF(t-t1)/LF(t-t1)+ A2, where A0, A1, and A2 are empirical country-specific coefficients, was found for developed economies. The relationship obtained for France is characterized by A0=-1, A1=4, A2=0.095, t0=4 years, and t1=4 years. For GDP deflator, it provides a RMS forecasting error (RMFSE) of 1.0% at a …
Natural Gas Storage — Inventory levels driving seasonal price spikes and energy inflation.
A CTA that trades futures on economic data, not only price — growth, inflation, positioning, and nowcasts as the signal set.
Behind the curve means policy (or a book) is too easy or too slow relative to incoming inflation, growth, or a Taylor-type benchmark — the market is already pricing a catch-up.
Hysteresis is path dependence: a temporary shock permanently scars the level of output, employment, or inflation expectations instead of washing out.
NAIRU is the unemployment rate consistent with stable inflation — below it, wage/price pressure tends to rise; above it, inflation tends to cool.
The quantity theory is MV = PY: money times velocity equals nominal income. In the strong form, a one-off money increase raises prices one-for-one if V and Y are stable.
Seigniorage is the real resources a sovereign (or a private issuer of money-like claims) obtains by issuing money whose production cost is below face value.
The Taylor rule is a simple policy reaction: set the policy rate to a neutral real rate plus inflation, then add weights on the inflation gap and the output gap.
Capacity Utilization — How tight industrial capacity is, informing pricing power and capex cycles.
CPI is a fixed-basket consumer-price index — the headline inflation print that sets TIPS, Social Security, and a lot of politics.
Core PCE Inflation — The Fed's preferred inflation gauge, stripping volatile food and energy components.
CPI Shelter Component — The largest CPI bucket, lagged versus spot rents, creating policy communication traps.
Disinflation is a falling inflation rate while prices still rise — the 2023 word, not deflation.
Inflation is a sustained rise in the general price level — a decline in purchasing power, not a one-off relative-price shock.
Inflation Expectations Survey — Household and market-based expectations that can de-anchor if policy credibility erodes.
Monetary Dominance Regime — Regime where the central bank anchors inflation over fiscal needs.
Output Gap — Estimated distance of GDP from potential output, informing policy reaction functions.
Phillips Curve — The relationship between labor market tightness and inflation dynamics, heavily debated in post-pandemic regimes.
PPI measures prices from the seller’s side of the pipeline — an upstream inflation print that may or may not pass through to CPI.
Retail Sales Growth — Nominal and real consumption momentum, critical for growth and inflation nowcasts.
Stagflation is high inflation with stagnant growth and a soft labor market — the 1970s regime that breaks the simple Phillips cartoon.
Unit Labor Costs — Compensation per unit of output — a core driver of services inflation persistence.
US 10-Year Breakeven Inflation reflects the inflation rate implied by the gap between nominal Treasuries and TIPS, serving as a market-based gauge of long-term inflation expectations.
Wage Growth — Nominal pay momentum that feeds services inflation persistence and Fed reaction functions.
The 1973–74 OPEC embargo quadrupled oil prices, fused inflation with a growth shock (stagflation), and ended the last illusions of the post-war energy-cheap regime.
Steepener Flattener Trade — Curve trades expressing views on growth, inflation, and term premium independently of level.
TIPS are US Treasuries whose principal adjusts with CPI — a real-rate instrument, not a magic inflation hedge for every horizon.
Real Effective Exchange Rate — Trade-weighted currency adjusted for inflation differentials.
The Fed’s dual mandate is maximum employment and stable prices — two goals that agree in a demand shock and fight in a supply shock.
Foreign Exchange Intervention — Official buying or selling of currency to manage disorderly moves and imported inflation.
A hard landing is a policy-induced recession — inflation (or a bubble) comes down because demand was broken.
A soft landing is disinflation (or a slowdown) without a recession — the hoped-for path off a hike cycle.
Risk Parity Allocation — Equal risk contribution across asset classes, often levered to bonds in disinflation.
Value Factor — Cheap versus expensive stocks — cyclical performance tied to rates and inflation.
US 10-Year Real Yield measures the inflation-adjusted yield on 10-year Treasuries and is a key benchmark for discount rates, financial conditions, and macro asset pricing.
Time equity beta with oil’s recent move or level — a macro overlay that treats crude as a growth/inflation signal.
Behind the curve means policy (or a book) is too easy or too slow relative to incoming inflation, growth, or a Taylor-type benchmark — the market is already pricing a catch-up.
CPI is a fixed-basket consumer-price index — the headline inflation print that sets TIPS, Social Security, and a lot of politics.
Core PCE Inflation — The Fed's preferred inflation gauge, stripping volatile food and energy components.
Time equity beta with oil’s recent move or level — a macro overlay that treats crude as a growth/inflation signal.
Disinflation is a falling inflation rate while prices still rise — the 2023 word, not deflation.
Foreign Exchange Intervention — Official buying or selling of currency to manage disorderly moves and imported inflation.
A hard landing is a policy-induced recession — inflation (or a bubble) comes down because demand was broken.
Hysteresis is path dependence: a temporary shock permanently scars the level of output, employment, or inflation expectations instead of washing out.
Inflation is a sustained rise in the general price level — a decline in purchasing power, not a one-off relative-price shock.
Inflation Expectations Survey — Household and market-based expectations that can de-anchor if policy credibility erodes.
Monetary Dominance Regime — Regime where the central bank anchors inflation over fiscal needs.
NAIRU is the unemployment rate consistent with stable inflation — below it, wage/price pressure tends to rise; above it, inflation tends to cool.
Natural Gas Storage — Inventory levels driving seasonal price spikes and energy inflation.
The 1973–74 OPEC embargo quadrupled oil prices, fused inflation with a growth shock (stagflation), and ended the last illusions of the post-war energy-cheap regime.
Phillips Curve — The relationship between labor market tightness and inflation dynamics, heavily debated in post-pandemic regimes.
PPI measures prices from the seller’s side of the pipeline — an upstream inflation print that may or may not pass through to CPI.
Real Effective Exchange Rate — Trade-weighted currency adjusted for inflation differentials.
Retail Sales Growth — Nominal and real consumption momentum, critical for growth and inflation nowcasts.
Risk Parity Allocation — Equal risk contribution across asset classes, often levered to bonds in disinflation.
A soft landing is disinflation (or a slowdown) without a recession — the hoped-for path off a hike cycle.
Stagflation is high inflation with stagnant growth and a soft labor market — the 1970s regime that breaks the simple Phillips cartoon.
Steepener Flattener Trade — Curve trades expressing views on growth, inflation, and term premium independently of level.
A CTA that trades futures on economic data, not only price — growth, inflation, positioning, and nowcasts as the signal set.
The Taylor rule is a simple policy reaction: set the policy rate to a neutral real rate plus inflation, then add weights on the inflation gap and the output gap.