Did the Crisis Affect Inflation Expectations?

We investigate whether the anchoring properties of longrun inflation expectations in the United States, the euro area, and the United Kingdom have changed around the economic crisis that erupted in mid-2007. We document that surveybased measures of long-run inflation expectations remained fairly stable around 2 percent in the euro area, fluctuated above 2 percent in the United States, and drifted up to about 2.5 percent in the United Kingdom. Expectations measures extracted from inflation-indexed bonds and inflation swaps became much more volatile in 2007. Moreover, structural break tests show that their sensitivity to news about inflation and other domestic macroeconomic variables—a measure of anchoring—increased during the crisis, and in particular during the heightened turmoil triggered by the collapse of Lehman Brothers. While liquidity premia and technical factors have significantly influenced the behavior of inflation-indexed markets since the outburst of the crisis, we show that these factors did not contaminate the relationship between macroeconomic news and financial market-based inflation expectations at the daily frequency. While our evidence is consistent with the idea that long-run inflation expectations may have become less firmly anchored during the crisis, problems in measuring expectations accurately make it difficult to draw definitive conclusions.