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Did the anchor of inflation expectations in the euro area turn adrift?

Author

Listed:
  • Gabriele Galati
  • Steven Poelhekke
  • Chen Zhou

Abstract

Survey evidence indicates that inflation expectations increased after HICP inflation rose markedly in the course of 2007 and the first half of 2008, underpinning a general view that inflation expectations may have become unanchored from the ECB's target. However, until now there has been no formal test of whether this has in fact been the case. We fill this gap by testing the reaction of financial market-based measures of long-term expectations inflation expectations to news about inflation and other macroeconomic variables in the main euro area economies. If long-term inflation expectations are anchored, they should not react to the arrival of news. We find evidence that long-term inflation expectations have started to drift away from the ECB's anchor in the course of 2007.

Suggested Citation

  • Gabriele Galati & Steven Poelhekke & Chen Zhou, 2008. "Did the anchor of inflation expectations in the euro area turn adrift?," DNB Working Papers 191, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:191
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    File URL: https://www.dnb.nl/binaries/Working%20paper%20191_tcm46-208072.pdf
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    Cited by:

    1. Michael Frenkel & Matthias Mauch & Jan-Christoph R├╝lke, 2017. "Forecaster Rationality and Expectation Formation in Foreign Exchange Markets: Do Emerging Markets Differ from Industrialized Economies?," WHU Working Paper Series - Economics Group 17-04, WHU - Otto Beisheim School of Management.
    2. repec:eee:ecmode:v:71:y:2018:i:c:p:202-213 is not listed on IDEAS

    More about this item

    Keywords

    ECB; euro-area inflation and inflation compensation; anchors for expectations; news announcements.&; nbsp;

    JEL classification:

    • 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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