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Anchors for Inflation Expectations

Author Info

Listed author(s):
  • Maria Demertzis
  • Massimiliano Marcellino
  • Nicola Viegi

Abstract

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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File URL: https://www.dnb.nl/binaries/229%20Anchors%20for%20Inflation%20Expectations_tcm46-225545.pdf
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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
Handle: RePEc:dnb:dnbwpp:229
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Web page: http://www.dnb.nl/en/

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Keywords: Inflation Targets; measures of Credibility.;

Find related papers by JEL classification:

  • 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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  1. Refet S. Gürkaynak & Andrew T. Levin & Eric T. Swanson, 2006. "Does inflation targeting anchor long-run inflation expectations? evidence from long-term bond yields in the U.S., U.K., and Sweden," Working Paper Series 2006-09, Federal Reserve Bank of San Francisco.
  2. 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.
  3. Maria Demertzis & Nicola Viegi, 2008. "Inflation Targets as Focal Points," International Journal of Central Banking, International Journal of Central Banking, vol. 4(1), pages 55-87, March.
  4. Bomfim, Antulio N & Rudebusch, Glenn D, 2000. "Opportunistic and Deliberate Disinflation under Imperfect Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 707-721, November.
  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. 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.
  7. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 715-741.
  8. Lawrence J. Christiano & Christopher J. Gust, 2000. "The expectations trap hypothesis," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 21-39.
  9. Patrick Perrier & Robert Amano, 2000. "Credibility and Monetary Policy," Bank of Canada Review, Bank of Canada, vol. 2000(Spring), pages 11-17.
  10. Croushore, Dean & Koot, Ronald S., 1994. "A measure of federal reserve credibility," Journal of Policy Modeling, Elsevier, vol. 16(2), pages 215-231, April.
  11. 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.
  12. Antonio Fatás & Ilian Mihov & Andrew K. Rose, 2007. "Quantitative Goals for Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(5), pages 1163-1176, 08.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. 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.
  18. 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.
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Cited by:

  1. Pierdzioch, Christian & Rülke, Jan-Christoph, 2013. "Do inflation targets anchor inflation expectations?," Economic Modelling, Elsevier, vol. 35(C), pages 214-223.
  2. Łyziak, Tomasz & Paloviita, Maritta, 2017. "Anchoring of inflation expectations in the euro area: Recent evidence based on survey data," European Journal of Political Economy, Elsevier, vol. 46(C), pages 52-73.
  3. Reyna Vergara González & Elías Eduardo Gutiérrez Alva, 2014. "Evaluación del cumplimiento de los objetivos de inflación y el papel de las expectativas: evidencia para México, 1995-2012," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(2), pages 1-32, November.
  4. Kenny, Geoff & Dovern, Jonas, 2017. "The long-term distribution of expected inflation in the euro area: what has changed since the great recession?," Working Paper Series 1999, European Central Bank.
  5. Bodo Herzog, 2015. "Anchoring of expectations: The role of credible targets in a game experiment," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 3(6), pages 1-15, December.
  6. Serkan Cicek & Cuneyt Akar, 2014. "Do Inflation Expectations Converge Toward Inflation Target or Actual Inflation? Evidence from Expectation Gap Persistence," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 14(1), pages 15-21.

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