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

  • Beechey, Meredith J
  • Johannsen, Benjamin K
  • Levin, Andrew

This paper compares the recent 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 also reveal substantially greater dispersion across forecasters’ long-horizon projections of U.S. inflation. Daily data on inflation swaps and nominal-indexed bond spreads - which gauge compensation for expected inflation and inflation risk - also suggest that long-run inflation expectations are more firmly anchored in the euro area than in the United States. In particular, surprises in macroeconomic data releases have significant effects on U.S. forward inflation compensation, even at long horizons, whereas macroeconomic news only influences euro area inflation compensation at short horizons.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6536.

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Date of creation: Oct 2007
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Handle: RePEc:cpr:ceprdp:6536
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  1. 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).
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  4. Refet Gurkaynak & Marcel Fratzscher & Eric Swanson & Michael Ehrmann, 2009. "Convergence And Anchoring Of Yield Curves In The Euro Area," 2009 Meeting Papers 897, Society for Economic Dynamics.
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  8. Refet S. Gürkaynak & Andrew T. Levin & Andrew N. Marder & Eric T. Swanson, 2006. "Inflation Targeting And The Anchoring Of Inflation Expectations In The Western Hemisphere," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(3), pages 19-52, December.
  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. Chesher, Andrew & Jewitt, Ian, 1987. "The Bias of a Heteroskedasticity Consistent Covariance Matrix Estimator," Econometrica, Econometric Society, vol. 55(5), pages 1217-22, September.
  11. 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.
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