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The Great Recession and the Two Dimensions of European Central Bank Credibility

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  • Timo Henckel
  • Gordon D. Menzies
  • Daniel J. Zizzo

Abstract

A puzzle from the Great Recession is an apparent mismatch between a fall in the persistence of European inflation rates, and the increased variability of expert forecasts of inflation. We explain this puzzle and show how country specific beliefs about inflation are still quite close to the European Central Bank target of 2% (what we call official target credibility) but the degree of anchoring to this target has gone down, implying an erosion of what we call anchoring credibility. A decline in anchoring credibility can explain increased forecast variance independently of any changes in inflation persistence, contrary to standard time series models.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-55.

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Length: 29 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-55

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Keywords: central bank credibility; excess volatility; euro; inferential expectations; inflation;

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