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The long-term distribution of expected inflation in the euro area: what has changed since the great recession?

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  • Kenny, Geoff
  • Dovern, Jonas

Abstract

This paper analyses the distribution of long-term inflation expectations in the euro area using individual density forecasts from the ECB Survey of Professional Forecasters. We exploit the panel dimension in this dataset to examine whether this distribution became less stable following the Great Recession, subsequent sovereign debt crisis and period when the lower bound on nominal interest rates became binding. Our results suggest that the distribution did change along several dimensions. We document a small downward shift in mean long-run expectations toward the end of our sample although they remain aligned with the ECB definition of price stability. More notably, however, we identify a trend toward a more uncertain and negatively skewed distribution with higher tail risk. Another main finding is that key features of the distribution are influenced by macroeconomic news, including the ex post historical track record of the central bank. JEL Classification: E31, E58

Suggested Citation

  • 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.
  • Handle: RePEc:ecb:ecbwps:20171999
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    Cited by:

    1. repec:eee:ecmode:v:72:y:2018:i:c:p:132-139 is not listed on IDEAS
    2. Ryan Niladri Banerjee & Aaron Mehrotra, 2018. "Deflation expectations," BIS Working Papers 699, Bank for International Settlements.

    More about this item

    Keywords

    density forecasts; ECB; euro area; inflation expectations;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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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