Estimating inflation expectation co-movement across countries

Inflation expectation is an important indicator for policy makers and financial investors. To capture a more accurate real-time estimate of inflation expectation on the basis of financial markets, we propose an arbitrage-free term structure model across different countries. We first estimate inflation expectation by modeling the nominal and the inflation-indexed bond yields jointly for each country. The joint dynamic model for inflation expectation is a cross sectional state space model combined with a GeoCopula model, which accounts for the default risk and the non Gaussian dependency structure over countries. We discover that the extracted common trend for inflation expectation is an important driver for each country of interest. Moreover, the model extracts informative estimates of inflation expectations and will provide good implications for monetary policies.