Stochastic modeling of inflation: a study of the Jarrow-Yildirim model

Inflation is currently among the most debated topics at both a political and economical level, given its direct consequences on people's lives. Therefore, both estimating its current and estimating its future values is a task of fundamental importance to set a correct monetary policy and achieve the desired targets. In particular, multiple measures are used to forecast inflation, but none seems to outperform all others over different time periods, as described in Meyer and Pasaogullari (2010). In order to provide an estimate of future expected inflation, in this thesis we will use the Jarrow-Yildirim (2003) model, which we will first analyze from a theoretic point of view. Despite this model was proposed to price TIPS, a security issued by the US Treasury and linked to an inflation index to return a constant real amount to its holders, it can be adopted to measure the difference between market's expected future real and nominal rates, thus providing an estimate of market's expected inflation by Fisher law.