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The Impact of EMU on Inflation Expectations

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  • Heinemann, Friedrich
  • Ullrich, Katrin

Abstract

This paper analyses the impact of the monetary regime change from the Bundesbank to the ECB in 1999 on inflation expectations. In the theoretical part, the Barro-Gordon model is used to derive the potential effect of a new central bank on inflation, inflation expectations and forecast errors. The econometric investigation is based on a flexible specification of expectation formation which allows both for rational and adaptive elements. Data on inflation expectations originate from the ZEW Financial Market Survey. The results indicate that the monetary regime change did not have a strong and lasting impact on the formation of inflation expectations and that the anti-inflationary credibility of both central banks is not perceived to differ significantly. However, the analysis also reveals that the years immediately before the start of EMU were characterised by a relatively large degree of uncertainty: in this time, market participants resorted to backward-looking expectations even more than usually. This is a plausible result because of the intitial uncertainty about the new central bank?s characteristics. Once in charge of monetary policy the ECB was quickly successful to restore certainty about its true Bundesbank-like type. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 04-01.

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Date of creation: 2004
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Handle: RePEc:zbw:zewdip:1601

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Keywords: inflation expectations; credibility; ZEW Financial market survey; ECB; EMU; Carlson-Parkin;

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References

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  1. Ullrich, Katrin, 2003. "A Comparison Between the Fed and the ECB: Taylor Rules," ZEW Discussion Papers 03-19, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. 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.
  3. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  4. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January.
  5. John A. Carlson & Neven T. Valev, 2002. "A Disinflation Trade-Off: Speed Versus Final Destination," Economic Inquiry, Western Economic Association International, vol. 40(3), pages 450-456, July.
  6. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  7. Jan Marc Berk, 1999. "Measuring inflation expectations: a survey data approach," Applied Economics, Taylor & Francis Journals, vol. 31(11), pages 1467-1480.
  8. Batchelor, Roy A & Orr, Adrian B, 1988. "Inflation Expectations Revisited," Economica, London School of Economics and Political Science, vol. 55(219), pages 317-31, August.
  9. Fair, Ray C, 1993. "Testing the Rational Expectations Hypothesis in Macroeconometric Models," Oxford Economic Papers, Oxford University Press, vol. 45(2), pages 169-90, April.
  10. Pesaran, M Hashem, 1985. "Formation of Inflation Expectations in British Manufacturing Industries," Economic Journal, Royal Economic Society, vol. 95(380), pages 948-75, December.
  11. Andolfatto, David & Scott Hendry & Kevin Moran, 2002. "Inflation Expectations and Learning about Monetary Policy," Working Papers 02-30, Bank of Canada.
  12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  13. Mitchell, James, 2002. "The use of non-normal distributions in quantifying qualitative survey data on expectations," Economics Letters, Elsevier, vol. 76(1), pages 101-107, June.
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Cited by:
  1. Caporale, Guglielmo Maria & Kontonikas, Alexandros, 2009. "The Euro and inflation uncertainty in the European Monetary Union," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 954-971, October.
  2. Tomasz Lyziak, 2014. "Inflation expectations in Poland, 2001–2013. Measurement and macroeconomic testing," National Bank of Poland Working Papers 178, National Bank of Poland, Economic Institute.
  3. Jan-Egbert Sturm & Timo Wollmershäuser, 2008. "The Stress of Having a Single Monetary Policy in Europe," CESifo Working Paper Series 2251, CESifo Group Munich.
  4. Prat, Georges & Uctum, Remzi, 2011. "Modelling oil price expectations: Evidence from survey data," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 236-247, June.
  5. Svatopluk Kapounek & Lubor Lacina, 2011. "Inflation Perceptions and Anticipations in the Old Eurozone Member States," Prague Economic Papers, University of Economics, Prague, vol. 2011(2), pages 120-139.
  6. Ullrich, Katrin, 2007. "Inflation Expectations of Experts and ECB Communication," ZEW Discussion Papers 07-054, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. Jörg Breitung, 2008. "Assessing the Rationality of Survey Expectations: The Probability Approach," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 228(5+6), pages 630-643, December.
  8. Guglielmo maria Coporale & Alexandros Kontonikas, 2006. "The EURO and Inflation Uncertainty In The EMU," Working Papers 2005_13, Business School - Economics, University of Glasgow.

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