Price discovery on traded inflation expectations: does the financial crisis matter?

For a central bank to fulfil its price stability mandate, the accurate assessment of inflation expectations is of crucial importance. Market participants gauging long-term investments have similar concerns about inflation. Traditionally, inflation expectations have been derived from models or through surveys of market participants’ opinions. In the mid to late 1990s financial markets started to trade claims on inflation actively. Analyzing this source of information has become standard by now. However, there are two main categories in which inflation claims are traded: inflation-linked bonds and inflation swaps. Which market can process information about inflation more quickly and with more impact on long-run equilibrium prices? Is it the size of the respective market that drives the lead in processing inflation information via BEIR? Has the financial crisis changed the price discovery process and biased it more towards one instrument? These are the key questions posed by this paper.