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International dynamics of inflation expectations

Author

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  • Aleksei Netšunajev
  • Lars Winkelmann

Abstract

To what extent are US and Euro Area (EA) inflation expectations determined by foreign shocks? How do transmissions change during the great recession and European sovereign debt crisis? We address these questions with a flexible structural VAR model of weekly financial markets’ inflation expectations and an index of commodity futures. For the identification of the model, we exploit the heteroscedasticity of the data. We propose instrument-type regressions to uncover the economic nature and origin of identified shocks. In line with the discussion about global inflation, we find that inflation expectations can be labeled global over short expectations horizons but local at long horizons. While large US macro shocks explain the strong drop in US and EA inflation expectations during the great recession, expectations shocks are the important driver from 2009 on.

Suggested Citation

  • Aleksei Netšunajev & Lars Winkelmann, 2016. "International dynamics of inflation expectations," SFB 649 Discussion Papers SFB649DP2016-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2016-019
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:ecolet:v:165:y:2018:i:c:p:39-43 is not listed on IDEAS
    2. Hachula, Michael & Nautz, Dieter, 2018. "The dynamic impact of macroeconomic news on long-term inflation expectations," Economics Letters, Elsevier, vol. 165(C), pages 39-43.

    More about this item

    Keywords

    Spillover; monetary policy; expectations shocks; financial crisis; identification through heteroskedasticity;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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