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Anchors for Inflation Expectations

  • Maria Demertzis
  • Massimiliano Marcellino
  • Nicola Viegi

We identify credible monetary policy with first, a disconnect between inflation and inflation expectations and second, the anchoring of the latter at the inflation target announced by the monetary authorities. We test empirically whether this is the case for a number of countries that have an explicit inflation target and therefore include the Euro Area. We find that for the last 10 year period, the two series are less dependent on each other and that announcing inflation targets help anchor expectations at the right level.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 229.

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Date of creation: Nov 2009
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Handle: RePEc:dnb:dnbwpp:229
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  1. Stefania Albanesi & V.V.Chari & Lawrence J. Christiano, 2002. "Expectation traps and monetary policy," Working Paper Series WP-02-04, Federal Reserve Bank of Chicago.
  2. Antonio Fatas & Ilian Mihov & Andrew K. Rose, 2004. "Quantitative Goals for Monetary Policy," NBER Working Papers 10846, National Bureau of Economic Research, Inc.
  3. Lawrence J. Christiano & Christopher J. Gust, 2000. "The expectations trap hypothesis," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 21-39.
  4. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 47-68, Fall.
  5. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  6. Demertzis Maria & Viegi Nicola, 2009. "Inflation Targeting: A Framework for Communication," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-32, December.
  7. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2008. "The Danger of Inflating Expectations of Macroeconomic Stability: Heuristic Switching in an Overlapping-Generations Monetary Model," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 219-254, June.
  8. Dean Croushore & Ronald S. Koot, 1991. "A measure of Federal Reserve credibility," Working Papers 91-1, Federal Reserve Bank of Philadelphia.
  9. Eyal Argov & David Rose & Philippe D Karam & Natan P. Epstein & Douglas Laxton, 2007. "Endogenous Monetary Policy Credibility in a Small Macro Model of Israel," IMF Working Papers 07/207, International Monetary Fund.
  10. Maria Demertzis & Nicola Viegi, 2004. "Inflation Targets as Focal Points," DNB Working Papers 017, Netherlands Central Bank, Research Department.
  11. 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.
  12. Stock, James H & Watson, Mark W, 1996. "Evidence on Structural Instability in Macroeconomic Time Series Relations," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 11-30, January.
  13. Demertzis Maria & Marcellino Massimiliano & Viegi Nicola, 2012. "A Credibility Proxy: Tracking US Monetary Developments," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-36, June.
  14. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80.
  15. Patrick Perrier & Robert Amano, 2000. "Credibility and Monetary Policy," Bank of Canada Review, Bank of Canada, vol. 2000(Spring), pages 11-17.
  16. Antulio N. Bomfim & Glenn D. Rudebusch, 1998. "Opportunistic and deliberate disinflation under imperfect credibility," Finance and Economics Discussion Series 1998-01, Board of Governors of the Federal Reserve System (U.S.).
  17. Norman Loayza & Raimundo Soto, 2002. "Inflation Targeting: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 1, pages 001-022 Central Bank of Chile.
  18. Orphanides, Athanasios & Williams, John C., 2005. "Expectations, learning and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1807-1808, November.
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