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How likely is an inflation disaster?

Hilscher, Jens, Raviv, Alon and Reis, Ricardo (2022) How likely is an inflation disaster? CEPR Press Discussion Paper (17224). Centre for Economic Policy Research (Great Britain), London, UK.

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The prices of long-dated inflation swap contracts provide a much-used estimate of expected inflation at far horizons. This paper develops the methods to estimate complementary tail probabilities for persistently very high or very low inflation using the prices of inflation options. For the object of interest—inflation disasters at long horizons—we show that three adjustments to conventional measures are crucial: for real payoffs, risk, and horizon. Applying the method to the United States (US) and the Eurozone (EZ) we find that (i) the probability of US deflation in 2011-14 was not very high, (ii) the tail probability of a deflation trap in the EZ post 2015 has been high throughout in spite of varying policies meant to address this issue, as well as shocks, and (iii) there was a significant steady rise in 2021 in the risk of persistent high US inflation, and a sharp rise in 2022 in the EZ.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2022 The Authors
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
G - Financial Economics > G1 - General Financial Markets > G10 - General
H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management
Date Deposited: 10 Feb 2023 10:48
Last Modified: 16 May 2024 12:26

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