The existence of a liquidity premium results in an understatement of the level of expected inflation derived from the break-even inflation rate. Some in-house research suggests this bias to be at around 5 to 15 basis points. Besides these technical biases, institutional arrangements may also introduce distortions in real yields, which impact in turn on the break-even inflation rate. I will mention two examples. Institutional biases The tax bias: the main source of distortion is probably related to taxation. Investors are primarily interested in real net-of-tax cash flows, which implies that differences in tax treatment between conventional and indexed bonds will influence their relative prices and therefore the break-even inflation rate. In the French case, where inflation compensation gains and interest rate income are equally taxed, this bias is generally considered as relatively small - less than 10 basis points. But even if it is small, it constitutes another upward distortion in the break-even. New regulations - supply and demand factors: as I mentioned, earlier, and I will conclude this section by this point, the French OATi, which so far has been the main inflation-indexed indicator used by the ECB in its economic and financial assessment, has been distorted by a significant upward demand shift which can be, to a certain extent, attributed to the adoption by the French Banking and Finance Regulation Committee (CRBF) of a new regulation on Livret A (passbook saving vehicle), aiming at linking this savings account partly to inflation .
Central banks must also avoid misperception and for that reason, they should not rely on a limited set of indicators but should use a comprehensive and rigorous analysis aimed at picturing the economy as a complex and permanently evolving system. Central banks also have the difficult task of identifying shocks hitting the economy and of addressing them appropriately by assessing their potential implications in terms of risks to price stability. Model analysis, monetary analysis, model -based forecasts are additional useful tools employed in this context. This is precisely the approach taken by the ECB, which developed its two-pillar-strategy in order to help to sort through the wealth of potentially conflicting statistics. Conclusion Let me now briefly conclude my remarks by asking the question: what information do we really get from asset prices, and particularly from inflation - indexed securities? Financial markets do indeed play a critical role in the process of setting monetary policy. In effect, the influence of monetary policy on the real economy and ultimately on prices is largely transmitted through asset prices. As pointed out by Blinder, the economic activity is not directly affected by the changes in the key policy rates, but rather by long-term interest rates and, where relevant, through wealth effects. In short, monetary policy affects the economy through its interaction with long-term expectations, which in turns affect asset prices and then economic activity and inflation. But central banks also rely on financial markets for information to help explain their monetary policy decisions.