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Did the Crisis Affect Inflation Expectations?


  • Gabriela Galati

    (Research Department, De Nederlandsche Bank)

  • Steven Poelhekke

    (Research Department, De Nederlandsche Bank and CESIfo, Munich)

  • Chen Zhou

    (Research Department, De Nederlandsche Bank, Erasmus University Rotterdam)


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.

Suggested Citation

  • Gabriela Galati & Steven Poelhekke & Chen Zhou, 2011. "Did the Crisis Affect Inflation Expectations?," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 167-207, March.
  • Handle: RePEc:ijc:ijcjou:y:2011:q:1:a:8

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    References listed on IDEAS

    1. Eric T. Swanson, 2006. "Would an inflation target help anchor U.S. inflation expectations?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue aug11.
    2. Wändi Bruine de Bruin & Michael F. Bryan & Simon M. Potter & Giorgio Topa & Wilbert Van der Klaauw, 2008. "Rethinking the measurement of household inflation expectations: preliminary findings," Staff Reports 359, Federal Reserve Bank of New York.
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies


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