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Are long-run inflation expectations anchored more firmly in the Euro area than in the United States?

  • Meredith J. Beechey
  • Benjamin K. Johannsen
  • Andrew T. Levin

This paper compares the recent evolution of long-run inflation expectations in the euro area and the United States, using evidence from financial markets and surveys of professional forecasters. Survey data indicate that long-run inflation expectations are reasonably well-anchored in both economies, but also reveal substantially greater dispersion across forecasters' long-horizon projections of U.S. inflation. Daily data on inflation swaps and nominal-indexed bond spreads--which gauge compensation for expected inflation and inflation risk--also suggest that long-run inflation expectations are more firmly anchored in the euro area than in the United States. In particular, surprises in macroeconomic data releases have significant effects on U.S. forward inflation compensation, even at long horizons, whereas macroeconomic news only influences euro area inflation compensation at short horizons.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-23.

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Date of creation: 2008
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Handle: RePEc:fip:fedgfe:2008-23
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  1. Ehrmann, Michael & Fratzscher, Marcel & Gürkaynak, Refet S. & Swanson, Eric T, 2007. "Convergence and Anchoring of Yield Curves in the Euro Area," CEPR Discussion Papers 6456, C.E.P.R. Discussion Papers.
  2. Michael J. Fleming & Eli M Remolona, 1999. "The term structure of announcement effects," BIS Working Papers 71, Bank for International Settlements.
  3. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
  4. Refet S. Gürkaynak & Andrew T. Levin & Andrew N. Marder & Eric T. Swanson, 2006. "Inflation Targeting And The Anchoring Of Inflation Expectations In The Western Hemisphere," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(3), pages 19-52, December.
  5. Michael Ehrmann & Marcel Fratzscher, 2004. "Equal size, equal role? interest rate interdependence between the euro area and the United States," International Finance Discussion Papers 800, Board of Governors of the Federal Reserve System (U.S.).
  6. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2007. "Shocks, Structures or Monetary Policies? The Euro Area and US After 2001," NBER Working Papers 13521, National Bureau of Economic Research, Inc.
  7. Chesher, Andrew & Jewitt, Ian, 1987. "The Bias of a Heteroskedasticity Consistent Covariance Matrix Estimator," Econometrica, Econometric Society, vol. 55(5), pages 1217-22, September.
  8. 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.
  9. Gerald P. Dwyer, Jr. & R.W. Hafer, 1989. "Interest rates and economic announcements," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 34-46.
  10. Linda Goldberg & Deborah Leonard, 2003. "What moves sovereign bond markets? The effects of economic news on U.S. and German yields," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 9(Sep).
  11. Magnus Andersson & Lars Jul Overby & Szabolcs Sebestyén, 2009. "Which News Moves the Euro Area Bond Market?," German Economic Review, Verein für Socialpolitik, vol. 10, pages 1-31, 02.
  12. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
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