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Anchors for Inflation Expectations

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  • Maria Demertzis
  • Massimiliano Marcellino
  • Nicola Viegi

Abstract

We identify credible monetary policy with first, a disconnect between inflation and inflation expectations and second, the anchoring of the latter at the inflation target announced by the monetary authorities. We test empirically whether this is the case for a number of countries that have an explicit inflation target and therefore include the Euro Area. We find that for the last 10 year period, the two series are less dependent on each other and that announcing inflation targets help anchor expectations at the right level.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 229.

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Date of creation: Nov 2009
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Handle: RePEc:dnb:dnbwpp:229

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Keywords: Inflation Targets; measures of Credibility.;

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References

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  1. Antonio Fatas & Ilian Mihov & Andrew K. Rose, 2004. "Quantitative Goals for Monetary Policy," NBER Working Papers 10846, National Bureau of Economic Research, Inc.
  2. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 715-741, October.
  3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  4. Patrick Perrier & Robert Amano, 2000. "Credibility and Monetary Policy," Bank of Canada Review, Bank of Canada, vol. 2000(Spring), pages 11-17.
  5. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," NBER Working Papers 13580, National Bureau of Economic Research, Inc.
  6. Maria Demertzis & Nicola Viegi, 2004. "Inflation Targets as Focal Points," DNB Working Papers 017, Netherlands Central Bank, Research Department.
  7. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80.
  8. Lawrence J. Christiano & Christopher Gust, 2000. "The expectations trap hypothesis," International Finance Discussion Papers 676, Board of Governors of the Federal Reserve System (U.S.).
  9. James H. Stock & Mark W. Watson, 1994. "Evidence on structural instability in macroeconomic times series relations," Working Paper Series, Macroeconomic Issues 94-13, Federal Reserve Bank of Chicago.
  10. Croushore, Dean & Koot, Ronald S., 1994. "A measure of federal reserve credibility," Journal of Policy Modeling, Elsevier, vol. 16(2), pages 215-231, April.
  11. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2006. "The danger of inflating expectations of macroeconomic stability: heuristic switching in an overlapping generations monetary model," Bank of England working papers 303, Bank of England.
  12. Demertzis Maria & Marcellino Massimiliano & Viegi Nicola, 2012. "A Credibility Proxy: Tracking US Monetary Developments," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-36, June.
  13. Maria Demertzis & Nicola Viegi, 2008. "Inflation Targeting: a Framework for Communication," Working Papers 71, Economic Research Southern Africa.
  14. Bomfim, Antulio N & Rudebusch, Glenn D, 2000. "Opportunistic and Deliberate Disinflation under Imperfect Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 707-21, November.
  15. Orphanides, Athanasios & Williams, John C., 2005. "Expectations, learning and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1807-1808, November.
  16. Norman Loayza & Raimundo Soto, 2002. "Inflation Targeting: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 1, pages 001-022 Central Bank of Chile.
  17. Refet S. Gürkaynak & Andrew T. Levin & Eric T. Swanson, 2006. "Does inflation targeting anchor long-run inflation expectations? evidence from long-term bond yields in the U.S., U.K., and Sweden," Working Paper Series 2006-09, Federal Reserve Bank of San Francisco.
  18. Eyal Argov & David Rose & Philippe D Karam & Natan P. Epstein & Douglas Laxton, 2007. "Endogenous Monetary Policy Credibility in a Small Macro Model of Israel," IMF Working Papers 07/207, International Monetary Fund.
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Cited by:
  1. Serkan ÇİÇEK & Cüneyt AKAR & Eray YÜCEL, 2011. "Türkiye’de enflasyon beklentilerinin çapalanması ve güvenilirlik," Iktisat Isletme ve Finans, Bilgesel Yayincilik, vol. 26(304), pages 37-55.
  2. Pierdzioch, Christian & Rülke, Jan-Christoph, 2013. "Do inflation targets anchor inflation expectations?," Economic Modelling, Elsevier, vol. 35(C), pages 214-223.
  3. van der Cruijsen, Carin & Demertzis, Maria, 2011. "How anchored are inflation expectations in EMU countries?," Economic Modelling, Elsevier, vol. 28(1-2), pages 281-298, January.
  4. Serkan Cicek & Cuneyt Akar, 2014. "Do Inflation Expectations Converge Toward Inflation Target or Actual Inflation? Evidence from Expectation Gap Persistence," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 14(1), pages 15-21.

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