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The common and specific components of inflation expectations across European countries

Author

Listed:
  • Shi Chen

    (Karlsruher Institut für Technologie)

  • Wolfgang Karl Härdle

    (Humboldt-Universität zu Berlin
    Singapore Management University
    Xiamen University
    National Chiao Tung University)

  • Weining Wang

    (York University)

Abstract

Inflation expectations (IEs) are often considered to be an important determinant of actual inflation in modern economic theory. This paper studies IE estimates across several European countries, focusing particularly on the key factors that determine the IE dynamics. We first use an arbitrage-free term structure model with both nominal and inflation-indexed bond yields to efficiently obtain the estimates for country-specific IEs. Second, we study the common and specific components of IE estimates in a multi-country factor model framework. We find that the estimated common IE component is an important driver for each country of interest especially for those EMU countries and can be used by central banks as a tool to help anchor IEs and enhance the conduct of monetary policy.

Suggested Citation

  • Shi Chen & Wolfgang Karl Härdle & Weining Wang, 2022. "The common and specific components of inflation expectations across European countries," Empirical Economics, Springer, vol. 62(2), pages 553-580, February.
    • Handle: RePEc:spr:empeco:v:62:y:2022:i:2:d:10.1007_s00181-021-02027-1
    DOI: 10.1007/s00181-021-02027-1
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    More about this item

    Keywords

    Inflation expectations; Joint yield-curve modeling; Factor model; Common trend; Spatial–temporal copulas;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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