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Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area Than in the United States?

  • Meredith J. Beechey
  • Benjamin K. Johannsen
  • Andrew T. Levin

This paper compares the evolution of long-run inflation expectations in the euro area and the United States, using evidence from financial markets and surveys of professional forecasters. Survey data indicate that long-run inflation expectations are reasonably well anchored in both economies but reveal substantially greater dispersion across forecasters' long-horizon projections of US inflation. Analysis of daily data on inflation swaps and nominal-indexed bond spreads, which gauge compensation for expected inflation and inflation risk, also suggests that long-run inflation expectations are more firmly anchored in the euro area than in the United States. (JEL D84, E31, E37, E52, E58)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.2.104
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File URL: http://www.aeaweb.org/aej/mac/data/2007-0059_data.zip
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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 3 (2011)
Issue (Month): 2 (April)
Pages: 104-29

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Handle: RePEc:aea:aejmac:v:3:y:2011:i:2:p:104-29
Note: DOI: 10.1257/mac.3.2.104
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. Refet Gurkaynak & Andrew T. Levin & Andrew N. Marder & Eric T. Swanson, 2007. "Inflation targeting and the anchoring of inflation expectations in the western hemisphere," Economic Review, Federal Reserve Bank of San Francisco, pages 25-47.
  2. Michael Ehrmann & Marcel Fratzscher & Refet S. Gürkaynak & Eric T. Swanson, 2007. "Convergence and anchoring of yield curves in the Euro area," Working Paper Series 2007-24, Federal Reserve Bank of San Francisco.
  3. Ehrmann, Michael & Fratzscher, Marcel, 2003. "Equal size, equal role? Interest rate interdependence between the Euro area and the United States," CFS Working Paper Series 2003/46, Center for Financial Studies (CFS).
  4. Chesher, Andrew & Jewitt, Ian, 1987. "The Bias of a Heteroskedasticity Consistent Covariance Matrix Estimator," Econometrica, Econometric Society, vol. 55(5), pages 1217-22, September.
  5. Christiano, Lawrence & Motto, Roberto & Rostagno, Massimo, 2008. "Shocks, structures or monetary policies? The Euro Area and US after 2001," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2476-2506, August.
  6. Magnus Andersson & Lars Jul Overby & Szabolcs Sebestyén, 2009. "Which News Moves the Euro Area Bond Market?," German Economic Review, Verein für Socialpolitik, vol. 10, pages 1-31, 02.
  7. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
  8. Linda Goldberg & Deborah Leonard, 2003. "What moves sovereign bond markets? The effects of economic news on U.S. and German yields," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 9(Sep).
  9. Gürkaynak, Refet S. & Levin, Andrew & Swanson, Eric T, 2006. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK and Sweden," CEPR Discussion Papers 5808, C.E.P.R. Discussion Papers.
  10. Michael J. Fleming & Eli M Remolona, 1999. "The term structure of announcement effects," BIS Working Papers 71, Bank for International Settlements.
  11. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
  12. Gerald P. Dwyer, Jr. & R.W. Hafer, 1989. "Interest rates and economic announcements," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 34-46.
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