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Consumers' Inflation Expectations and Monetary Policy in Europe

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  • J.M. Berk

Abstract

This paper analyses the effects of monetary policy decisions on inflation expectations of European consumers. Using a novel approach that does not assume unbiasedness of expectations, which makes use of survey data on expected future as well as perceived past price developments and allows for non-normal peakedness and asymmetry, we convert qualitative survey responses of consumers in various European countries into quantitative time series of inflation expectations. After checking the rationality of the constructed expectations measures, we investigate the effects of unanticipated movements in interest rates and inflation on inflation expectations across European countries. We inter alia seek to explore whether the reaction of consumers in countries with more credible central banks differs from the reaction of consumers in less credible countries.

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File URL: http://www.dnb.nl/binaries/sr055_tcm46-146833.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 55.

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Length: 28 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:dnb:staffs:55

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Keywords: Inflation expectations; Survey data; Monetary policy;

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References

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  1. Hasan Bakhshi & Anthony Yates, 1998. "Are UK inflation expectations rational?," Bank of England working papers 81, Bank of England.
  2. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  3. Bagliano, Fabio C. & Favero, Carlo A., 1999. "Information from financial markets and VAR measures of monetary policy," European Economic Review, Elsevier, vol. 43(4-6), pages 825-837, April.
  4. James Chan-Lee, 1980. "A review of recent work in the area of inflationary expectations," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 116(1), pages 45-86, March.
  5. Balcombe, Kelvin, 1996. "The Carlson-Parkin method applied to NZ price expectations using QSBO survey data," Economics Letters, Elsevier, vol. 51(1), pages 51-57, April.
  6. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  7. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  8. Batchelor, R. A., 1982. "Expectations, output and inflation : The European experience," European Economic Review, Elsevier, vol. 17(1), pages 1-25.
  9. Fischer, Andreas M, 1989. "Unit Roots and Survey Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(4), pages 451-63, November.
  10. Jan Marc Berk, 1999. "Measuring inflation expectations: a survey data approach," Applied Economics, Taylor & Francis Journals, vol. 31(11), pages 1467-1480.
  11. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  12. Dickey, David A & Pantula, Sastry G, 2002. "Determining the Order of Differencing in Autoregressive Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 18-24, January.
  13. Yin-Wong Cheung & Menzie Chinn, 1995. "Integration, cointegration and the forecast consistency of structural exchange rate models," International Finance 9508002, EconWPA.
  14. Menil, George & Bhalla, Surjit S, 1975. "Direct Measurement of Popular Price Expectations," American Economic Review, American Economic Association, vol. 65(11), pages 169-80, March.
  15. Ignazio Angeloni, 2010. "Monetary Policy and Risk Taking," Working Papers 380, Bruegel.
  16. Engle, R. F. & Granger, C. W. J. (ed.), 1991. "Long-Run Economic Relationships: Readings in Cointegration," OUP Catalogue, Oxford University Press, number 9780198283393, September.
  17. Batchelor, R A, 1986. "Quantitative v. Qualitative Measures of Inflation Expectations," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(2), pages 99-120, May.
  18. Evans, George & Gulamani, Riyaz, 1984. "Tests for Rationality of the Carlson-Parkin Inflation Expectations Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 46(1), pages 1-19, February.
  19. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  20. Dasgupta, Susmita & Lahiri, Kajal, 1992. "A Comparative Study of Alternative Methods of Quantifying Qualitative Survey Responses Using NAPM Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 391-400, October.
  21. Batchelor, Roy & Dua, Pami, 1992. "Survey Expectations in the Time Series Consumption Function," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 598-606, November.
  22. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, vol. 42(166), pages 123-38, May.
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Citations

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Cited by:
  1. Kozo Ueda, 2009. "Determinants of Households' Inflation Expectations," IMES Discussion Paper Series 09-E-08, Institute for Monetary and Economic Studies, Bank of Japan.
  2. Angelo M. Fasolo & Marcelo Savino Portugal, 2003. "Imperfect Rationality and Inflationary Inertia: a New Estimation of the Phillips Curve for Brazil," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] b34, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  3. Wilbert van der Klaauw & Wändi Bruine de Bruin & Giorgio Topa & Simon Potter & Michael Bryan, 2008. "Rethinking the measurement of household inflation expectations: preliminary findings," Staff Reports 359, Federal Reserve Bank of New York.
  4. Ivo J.M. Arnold & Jan J.G. Lemmen, 2008. "Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 144(2), pages 325-346, July.
  5. Jan Marc Berk & Gerbert Hebbink, 2006. "The anchoring of European inflation expectations," DNB Working Papers 116, Netherlands Central Bank, Research Department.
  6. Steffen Henzel & Timo Wollmershäuser, 2005. "An Alternative to the Carlson-Parkin Method for the Quantification of Qualitative Inflation Expectations: Evidence from the Ifo World Economic Survey," Ifo Working Paper Series Ifo Working Papers No. 9, Ifo Institute for Economic Research at the University of Munich.
  7. Gerberding, Christina, 2001. "The information content of survey data on expected price developments for monetary policy," Discussion Paper Series 1: Economic Studies 2001,09, Deutsche Bundesbank, Research Centre.
  8. Henry Sabrowski, 2008. "Inflation Expectation Formation of German Consumers: Rational or Adaptive?," Working Paper Series in Economics 100, University of Lüneburg, Institute of Economics.
  9. Mestre, Ricardo, 2007. "Are survey-based inflation expections in the euro area informative?," Working Paper Series 0721, European Central Bank.
  10. Ueda, Kozo, 2010. "Determinants of households' inflation expectations in Japan and the United States," Journal of the Japanese and International Economies, Elsevier, vol. 24(4), pages 503-518, December.

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