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Did the anchor of inflation expectations in the euro area turn adrift?

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  • Gabriele Galati
  • Steven Poelhekke
  • Chen Zhou

Abstract

Survey evidence indicates that inflation expectations increased after HICP inflation rose markedly in the course of 2007 and the first half of 2008, underpinning a general view that inflation expectations may have become unanchored from the ECB's target. However, until now there has been no formal test of whether this has in fact been the case. We fill this gap by testing the reaction of financial market-based measures of long-term expectations inflation expectations to news about inflation and other macroeconomic variables in the main euro area economies. If long-term inflation expectations are anchored, they should not react to the arrival of news. We find evidence that long-term inflation expectations have started to drift away from the ECB's anchor in the course of 2007.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 191.

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Date of creation: Dec 2008
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Handle: RePEc:dnb:dnbwpp:191

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Keywords: ECB; euro-area inflation and inflation compensation; anchors for expectations; news announcements.&; nbsp;

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