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Inflation Expectations and Monetary Policy Surprises

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  • Snezana Eminidou

    (University of Cyprus)

  • Marios Zachariadis

    (University of Cyprus)

  • Elena Andreou

    (University of Cyprus)

Abstract

We use monthly data across fifteen euro-area economies for the period 1985:1-2015:3 to obtain monetary policy changes that can be regarded as surprises for different types of consumers. A novel feature of our empirical approach is the estimation of monetary policy surprises based on changes in monetary policy that were unanticipated according to the consumers stated beliefs about the economy. We go on to investigate how these monetary policy surprises affect consumers' inflation expectations. We find that such monetary policy surprises can have the opposite impact on inflation expectations to those obtained under the assumption that consumers are well informed about a set of macroeconomic variables describing the state of the economy. More specifically, when we relax the assumption of well informed consumers by focusing instead on their stated beliefs about the economy, unanticipated increases in the interest rate raise inflation expectations. This is consistent with imperfect information theoretical settings where unanticipated increases in interest rates are interpreted as positive news about the state of the economy by consumers that know policymakers have relatively more information. This impact changes sign since the Crisis.

Suggested Citation

  • Snezana Eminidou & Marios Zachariadis & Elena Andreou, 2017. "Inflation Expectations and Monetary Policy Surprises," 2017 Meeting Papers 919, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:919
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    Cited by:

    1. Snezana Eminidou & Marios Zachariadis, 2019. "Firms’ Expectations and Monetary Policy Shocks in the Eurozone," University of Cyprus Working Papers in Economics 02-2019, University of Cyprus Department of Economics.
    2. Alexandros Kontonikas & Charles Nolan & Zivile Zekaite & Michael Lamla, 2019. "Treasuries variance decomposition and the impact of monetary policy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(4), pages 1506-1519, October.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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