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Citation: Hilscher, Jens, Alon Raviv, and Ricardo Reis (2022) "How Likely is an Inflation Disaster?" CEPR discussion paper 17244, April. bibtex
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​​Main estimates high inflation - US

Probabilities of a high inflation disaster in the United States:
-- "inflation >4% on average" is inflation in five years for five years (e.g. from 2027 to 2032) above 4%. This is a larger than 10 log-point deviation from the 2% target. 
-- "inflation >5% on average" is inflation in five years for five years (e.g. from 2027 to 2032) above 5%. This is a larger than 15 log-point deviation from the 2% target. 

These probabilities are perceived by market participants, as reflected in the cost of insurance against these events by buying options.
Source: Hilscher, Raviv and Reis (2022)
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Main estimates high inflation - EZ

 Probabilities of a high inflation disaster in the Eurozone:
-- "inflation >4% on average" is inflation in five years for five years (e.g. from 2027 to 2032) above 4%. This is a larger than 10 log-point deviation from the 2% target. 
-- "inflation >5% on average" is inflation in five years for five years (e.g. from 2027 to 2032) above 5%. This is a larger than 15 log-point deviation from the 2% target. 

These probabilities are perceived by market participants, as reflected in the cost of insurance against these events by buying options.

Source: Hilscher, Raviv and Reis (2022)
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Main estimates deflation - US

Probabilities of a low inflation disaster in the United States:
-- "inflation <4% on average" is inflation in five years for five years (e.g. from 2027 to 2032) below 0%. This is a larger than 10 log-point deviation from the 2% target. 
-- "inflation <-1 on average" is inflation in five years for five years (e.g. from 2027 to 2032) below -1%. This is a larger than 15 log-point deviation from the 2% target. 

​These probabilities are perceived by market participants, as reflected in the cost of insurance against these events by buying options.

Source: Hilscher, Raviv and Reis (2022)
Picture

Main estimates deflation - EZ

Probabilities of a low inflation disaster in the Eurozone:
-- "inflation <4% on average" is inflation in five years for five years (e.g. from 2027 to 2032) below 0%. This is a larger than 10 log-point deviation from the 2% target. 
-- "inflation <-1 on average" is inflation in five years for five years (e.g. from 2027 to 2032) below -1%. This is a larger than 15 log-point deviation from the 2% target. 

​These probabilities are perceived by market participants, as reflected in the cost of insurance against these events by buying options.

Source: Hilscher, Raviv and Reis (2022)
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Without horizon adjustment - US and EZ

Probabilities of a high inflation disaster in the United States and the EZ:
-- "inflation >4% on average" is inflation over next five years (e.g. from 2022 to 2027) above 4%. This is a larger than 10 log-point deviation from the 2% target. 
-- Without horizon adjustment, so including near-term years.
​

​These probabilities are perceived by market participants, as reflected in the cost of insurance against these events by buying options. 
Source: Hilscher, Raviv and Reis (2022)
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Without horizon or risk adjustment - US

Risk-neutral probability densities of inflation in the United States:
-- horizon is average over next 10 years (e.g. from 2022 to 2032)
-- Without horizon adjustment, so including near-term years, and without risk adjustment, so there would only coincide with actual probabilities if investors were risk neutral.
​

​These probabilities are perceived by market participants, as reflected in the cost of insurance against these events by buying options. 
Source: Hilscher, Raviv and Reis (2022)
Picture

Without horizon or risk adjustment - EZ

Risk-neutral probability densities of inflation in the Eurozone:
-- horizon is average over next 10 years (e.g. from 2022 to 2032)
​-- Without horizon adjustment, so including near-term years, and without risk adjustment, so there would only coincide with actual probabilities if investors were risk neutral.
​

​These probabilities are perceived by market participants, as reflected in the cost of insurance against these events by buying options.
Source: Hilscher, Raviv and Reis (2022)

Datasets, from January 2011 until the present

Data series on disaster probabilities: United States and Eurozone
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