Did the crisis affect inflation expectations?
AbstractWe investigate whether the anchoring properties of long-run inflation expectations in the United States, the euro area and the United Kingdom have changed around the economic crisis that erupted in mid-2007. We document that in these three economies, expectations measures extracted from inflation-indexed bonds and inflation swaps became much more volatile in 2007. Moreover, their sensitivity to news about inflation and other domestic macroeconomic variables - a measure of anchoring - increased first during the oil price rally in 2006-07, and then during the heightened turmoil triggered by the collapse of Lehman Brothers. Liquidity premia and technical factors have significantly influenced the behaviour of inflation-indexed markets since the outburst of the crisis. We show, however, that these factors did not contaminate the relationship between macroeconomic news and financial market-based inflation expectations at the daily frequency. By testing for structural breaks we conclude that in the United States, the euro area and the United Kingdom, long-run inflation expectations have become less firmly anchored during the crisis.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 222.
Date of creation: Sep 2009
Date of revision:
monetary policy; inflation and inflation compensation; anchors for expectations; crisis; liquidity.;
Other versions of this item:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-17 (All new papers)
- NEP-CBA-2009-10-17 (Central Banking)
- NEP-EEC-2009-10-17 (European Economics)
- NEP-MAC-2009-10-17 (Macroeconomics)
- NEP-MON-2009-10-17 (Monetary Economics)
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