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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 2006�07, 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.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 222.

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Date of creation: Sep 2009
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Handle: RePEc:dnb:dnbwpp:222
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Web page: http://www.dnb.nl/en/

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