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Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area than in the United States?

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  • Beechey, Meredith J
  • Johannsen, Benjamin K
  • Levin, Andrew

Abstract

This paper compares the recent evolution of long-run inflation expectations in the euro area and the United States, using evidence from financial markets and surveys of professional forecasters. Survey data indicate that long-run inflation expectations are reasonably well-anchored in both economies, but also reveal substantially greater dispersion across forecasters’ long-horizon projections of U.S. inflation. Daily data on inflation swaps and nominal-indexed bond spreads - which gauge compensation for expected inflation and inflation risk - also suggest that long-run inflation expectations are more firmly anchored in the euro area than in the United States. In particular, surprises in macroeconomic data releases have significant effects on U.S. forward inflation compensation, even at long horizons, whereas macroeconomic news only influences euro area inflation compensation at short horizons.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6536.

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Date of creation: Oct 2007
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Handle: RePEc:cpr:ceprdp:6536

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Keywords: central bank communication; ECB; euro-area inflation; inflation compensation;

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  1. Gürkaynak, Refet S. & Levin, Andrew & Swanson, Eric T, 2006. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK and Sweden," CEPR Discussion Papers 5808, C.E.P.R. Discussion Papers.
  2. Refet S. Gürkaynak & Andrew T. Levin & Andrew N. Marder & Eric T. Swanson, 2007. "Inflation Targeting and the Anchoring of Inflation Expectations in the Western Hemisphere," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 11, pages 415-465 Central Bank of Chile.
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  6. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
  7. Ehrmann, Michael & Fratzscher, Marcel & Gürkaynak, Refet S. & Swanson, Eric T, 2007. "Convergence and Anchoring of Yield Curves in the Euro Area," CEPR Discussion Papers 6456, C.E.P.R. Discussion Papers.
  8. Magnus Andersson & Lars Jul Hansen & Szabolcs Sebestyén, 2006. "Which news moves the euro area bond market?," Working Paper Series 631, European Central Bank.
  9. Michael Ehrmann & Marcel Fratzscher, 2004. "Equal size, equal role? interest rate interdependence between the euro area and the United States," International Finance Discussion Papers 800, Board of Governors of the Federal Reserve System (U.S.).
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