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Macroeconomic implications of heterogeneous long-term inflation expectations: illustrative simulations through the ECB-BASE

Author

Listed:
  • Darracq Pariès, Matthieu
  • Zimic, Srečko

Abstract

We show how heterogeneous expectations across agents can change the macroeconomic outcomes of an increase in long-term inflation expectations. A broad-based expectation of higher longer-term inflation can be expected to lift the short to medium-term inflation outlook and have an expansionary effect on economic activity. If the financial markets are the only segment of the economy repricing higher longer-term inflation expectations, the associated tightening of financing conditions would hamper firms’ and households’ expenditure decisions and prevent any price pressures from building up. JEL Classification: E1, E3, I1

Suggested Citation

  • Darracq Pariès, Matthieu & Zimic, Srečko, 2021. "Macroeconomic implications of heterogeneous long-term inflation expectations: illustrative simulations through the ECB-BASE," Economic Bulletin Boxes, European Central Bank, vol. 3.
    • Handle: RePEc:ecb:ecbbox:2021:0003:3
    Note: 604093
    as

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    File URL: https://www.ecb.europa.eu//pub/economic-bulletin/focus/2021/html/ecb.ebbox202103_03~7f2ac55705.en.html
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    Citations

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    Cited by:

    1. Baumann, Ursel & Darracq Pariès, Matthieu & Westermann, Thomas & Riggi, Marianna & Bobeica, Elena & Meyler, Aidan & Böninghausen, Benjamin & Fritzer, Friedrich & Trezzi, Riccardo & Jonckheere, Jana & , 2021. "Inflation expectations and their role in Eurosystem forecasting," Occasional Paper Series 264, European Central Bank.

    More about this item

    Keywords

    ECB-BASE; Long-term inflation expectations; modelling;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • I1 - Health, Education, and Welfare - - Health

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