Advanced Search
MyIDEAS: Login to save this article or follow this journal

Shocks, the Crisis and Uncertainty about Future Inflation: Theory and Evidence for the Euro Area

Contents:

Author Info

Abstract

This study is motivated by the recent increase in volatility of both inflation and inflation expectations, triggered initially by the surge in commodity prices and more recently by the global economic crisis. While inflation uncertainty rose only moderately in response to the commodity and energy price shock in 2007, the financial and economic crisis triggered a dramatic increase across all types of agents, which was also reflected in historically large forecast errors. During the final months of 2009, both inflation expectations and uncertainty returned to more moderate levels. Uncertainty about future inflation may pose a problem both for monetary policy and for economic efficiency at large. Our study shows that various strands of economic theory offer quite diverse explanations for the mechanisms behind the formation of inflation expectations and the associated uncertainty. Our econometric estimates suggest that behavioral heuristics and information constraints or bounded rationality may indeed influence agents’ uncertainty about future inflation. For instance, both consumers and professional forecasters seem to invest more effort in forming expectations about future inflation if and when inflation developments become more salient. However, in the case of consumers faced with very large inflation shocks, this effect seems to be dampened by other behaviors. In contrast to consumers, professional forecasters’ uncertainty about future inflation reacts to news about the business cycle and monetary policy, which points to their use of a richer data set and more sophisticated models in forming inflation expectations.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Monetary-Policy-and-the-Economy/2010/Monetary-Policy-and-the-Economy-Q1-10/chapters/mop_2010_q1_analyses_02_tcm16-190387.pdf
Download Restriction: no

Bibliographic Info

Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Monetary Policy & the Economy.

Volume (Year): (2010)
Issue (Month): 1 ()
Pages: 26–52

as in new window
Handle: RePEc:onb:oenbmp:y:2010:i:1:b:2

Contact details of provider:
Postal: P.O. Box 61, A-1011 Vienna, Austria
Phone: +43/1/404 20 7405
Fax: +43/1/404 20 7499
Email:
Web page: http://www.oenb.at
More information through EDIRC

Order Information:
Postal: Oesterreichische Nationalbank, Documentation Management and Communications Services, Otto-Wagner Platz 3, A-1090 Vienna, Austria
Email:

Related research

Keywords: inflation expectations; uncertainty; behavioral economics; heterogeneous agents;

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Koop, Gary & Onorante, Luca, 2011. "Estimating Phillips Curves in Turbulent Times using the ECB’s Survey of Professional Forecasters," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2011-19, Scottish Institute for Research in Economics (SIRE).
  2. Gary Koop & Luca Onorante, 2011. "Estimating Phillips Curves in Turbulent Times using the ECBs Survey of Professional Forecasters," Working Papers, University of Strathclyde Business School, Department of Economics 1109, University of Strathclyde Business School, Department of Economics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:onb:oenbmp:y:2010:i:1:b:2. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudia Kwapil).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.