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Long-term inflation expectations and monetary policy in the euro area before the pandemic

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  • Neri, Stefano

Abstract

Survey-based long-term inflation expectations in the euro area reached historically low levels at the end of 2019. A structural VAR analysis shows that the decline in long-term expectations exerted a downward pressure on inflation during the 2013–14 disinflation and in 2019. Counterfactual simulations show that the decrease in inflation would have been larger and output would have declined had the European Central Bank not responded to the fall in expectations. A small New Keynesian model, in which the private sector's estimate of the inflation target varies with inflation, can rationalise the VAR evidence.

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  • Neri, Stefano, 2023. "Long-term inflation expectations and monetary policy in the euro area before the pandemic," European Economic Review, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:eecrev:v:154:y:2023:i:c:s0014292123000557
    DOI: 10.1016/j.euroecorev.2023.104426
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    Cited by:

    1. Stefano Neri & Fabio Busetti & Cristina Conflitti & Francesco Corsello & Davide Delle Monache & Alex Tagliabracci, 2023. "Energy price shocks and inflation in the euro area," Questioni di Economia e Finanza (Occasional Papers) 792, Bank of Italy, Economic Research and International Relations Area.
    2. Stefano Neri, 2024. "There has been an awakening. The rise (and fall) of inflation in the euro area," Questioni di Economia e Finanza (Occasional Papers) 834, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Long-term inflation expectations; Monetary policy; Structural VAR; New Keynesian model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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