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Did the crisis affect inflation expectations?


  • Gabriele Galati
  • Steven Poelhekke
  • Chen Zhou


We investigate whether the anchoring properties of long-run 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 in these three economies, expectations measures extracted from inflation-indexed bonds and inflation swaps became much more volatile in 2007. Moreover, their sensitivity to news about inflation and other domestic macroeconomic variables a measure of anchoring increased first during the oil price rally in 200607, and then during the heightened turmoil triggered by the collapse of Lehman Brothers. Liquidity premia and technical factors have significantly influenced the behaviour of inflation-indexed markets since the outburst of the crisis. We show, however, that these factors did not contaminate the relationship between macroeconomic news and financial market-based inflation expectations at the daily frequency. By testing for structural breaks we conclude that in the United States, the euro area and the United Kingdom, long-run inflation expectations have become less firmly anchored during the crisis.

Suggested Citation

  • Gabriele Galati & Steven Poelhekke & Chen Zhou, 2009. "Did the crisis affect inflation expectations?," DNB Working Papers 222, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:222

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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. Wilbert Van der Klaauw & Wändi Bruine de Bruin & Giorgio Topa & Simon M. Potter & Michael F. Bryan, 2008. "Rethinking the measurement of household inflation expectations: preliminary findings," Staff Reports 359, Federal Reserve Bank of New York.
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    More about this item


    monetary policy; inflation and inflation compensation; anchors for expectations; crisis; liquidity.;

    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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