Dr. Luca Benzoni
Senior Financial Economist
Federal Reserve Bank of Chicago
luca.benzoni@chi.frb.org

Lecture Title: Consumer Prices and the Term Structure of Interest Rates

We propose a no-arbitrage model that jointly explains the dynamics of consumer prices as well as the nominal and real term structures of risk-free rates. In our framework, distinct core, food, and energy price series combine into a measure of total inflation to price nominal Treasuries. This approach captures different frequencies in inflation fluctuations: Shocks to core are more persistent and less volatile than shocks to food and, especially, energy (the `crust’). We find that a common structure of latent factors determines and predicts the term structure of yields and inflation. The model outperforms popular benchmarks and is at par with the Survey of Professional Forecasters in forecasting inflation. Real rates implied by our model uncover the presence of a time-varying component in TIPS yields that we attribute to disruptions in the inflation-indexed bond market. Finally, we find a pronounced declining pattern in the inflation risk premium that illustrates the changing nature of inflation risk in nominal Treasuries.

Speaker Bio:

Luca Benzoni is a senior financial economist in the economic research department at the Federal Reserve Bank of Chicago. Benzoni’s research focuses on the modeling of volatility in equity and interest rate markets, derivatives pricing, asset allocation over the life cycle, and conflict of interest and certification in the U.S. IPO market.Benzoni’s research has been published in the Journal of Finance, Journal of Financial Economics and Journal of Financial Intermediation. Before joining the Chicago Fed in September 2006, Benzoni was an assistant professor in finance at the University of Minnesota.Benzoni received a B.A. from Bocconi University (Milan, Italy) and a Ph.D. in finance from the Kellogg School of Management, Northwestern University.