Anchoring of inflation expectations in the euro area: Recent evidence based on survey data

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The selection and refereeing process for this paper was carried out by the Chairs of the Task Force. Papers were selected based on their quality and on the relevance of the research subject to the aim of the Task Force. The authors of the selected papers were invited to revise their paper to take into consideration feedback received during the preparatory work and the referee's and Editors' comments. Terms of use: Documents in EconStor mayThe paper is released to make the research of LIFT generally available, in preliminary form, to encourage comments and suggestions prior to final publication. The views expressed in the paper are the ones of the author(s) and do not necessarily reflect those of the ECB, the ESCB, or any of the ESCB National Central Banks.ECB Working JEL: D84, E52, E58 Keywords:Inflation expectations, anchoring, survey data, euro area, financial crisis. ECB Working Paper 1945, August 2016 2 Non-technical summaryThis paper examines the anchoring of survey-based measures of inflation expectations in the euro area. We consider inflation expectations of professional forecasters and consumers for 1999Q1-2015Q3. In the case of the professional forecasters, we use one-year ahead, two-years ahead and 4-5-years ahead inflation forecasts from the ECB Survey of Professional Forecasters (SPF), conducted every quarter. In the case of consumers, we use the European Commission Consumer survey, which provides a unique set of harmonised monthly data on 12-months ahead consumer inflation expectations across the EU economies. As the survey question is qualitative, we quantify consumer inflation expectations using the probability approach.We analyse anchoring of inflation expectations in the EMU period and pay special attention to possible changes in anchoring over the last few years, a period characterized by low inflation, increased economic uncertainty, zero lower bound (ZLB), and unconventional monetary policy measures. First, we examine the responsiveness of inflation expectations to actual inflation and the reaction of longer-term inflation expectations to shorter-term ones. Then, we analyse the anchoring of long-term inflation expectations to the ECB inflation target and extend this analysis to describe the behaviour of short-and medium-term inflation expectations. The novelty of our approach is in assessing the effectiveness of two main communication tools used by the ECB, the inflation target and the ECB inflation projections provided by the Eurosy...

Measuring Inflation Anchoring and Uncertainty: A U.S. and Euro Area Comparison

“…46. To some extent, this finding of a decrease in euro-area anchoring is in line with Łyziak and Paloviita (2016), who find that euro-area long-term inflation forecasts became more sensitive to realized HICP inflation and to shorter-term forecasts in the postcrisis period. NOTE: This figure illustrates the decomposition of the anchoring measure into two components: one that relates to the fluctuation of the conditional mean (Part A) and another that corresponds to the influence of changes in uncertainty (Part B), as defined in equation (14).…”

“…One popular measure is the response of inflation compensation measures (e.g., TIPS breakeven rates or inflation swaps) or interest rates to incoming macroeconomic news (Gürkaynak et al 2007, Mishkin 2007, Beechey, Johannsen, and Levin 2011, De Pooter et al 2014, Speck 2016. Other measures include the response of (changes in) long-term inflation expectations to (changes in) short-term ones (Buono andFormai 2016, Gerlach, Moessner, andRosenblatt 2017), the precision around estimates of the level of inflation (Mehrotra and Yetman 2014), the volatility of shocks to trend inflation (Mertens 2016), and the closeness of average beliefs to the central bank's inflation target (Kumar et al 2015, Łyziak andPaloviita 2016).…”

Measuring Inflation Anchoring and Uncertainty: A US and Euro Area Comparison

“…32 To some extent, this finding of a decrease in euro-area anchoring is in line with Łyziak and Paloviita (2016), who find that euro-area long-term inflation forecasts became more sensitive to realized HICP inflation and to shorter-term forecasts in the post-crisis period.…”

“…One popular measure is the response of inflation compensation measures (TIPS break-even rates of inflation swaps) or interest rates to incoming macroeconomic news (Gürkaynak, Levin, Marder, and Swanson, 2007;Mishkin, Introduction 2007;Beechey, Johannsen, and Levin, 2011;De Pooter, Robitaille, Walker, and Zdinak, 2014;Speck, 2016). Other measures include the response of (changes in) long-term inflation expectations to (changes in) short-term ones (Buono and Formai, 2016;Gerlach, Moessner, and Rosenblatt, 2017), the precision around estimates of the level of inflation (Mehrotra and Yetman, 2014), the volatility of shocks to trend inflation (Mertens, 2016), and the closeness of average beliefs to the central bank's inflation target (Kumar, Afrouzi, Coibion, and Gorodnichenko, 2015;Łyziak and Paloviita, 2016). …”

Does Uncertainty Affect Non-response to the European Central Bank’s Survey of Professional Forecasters?

“…The European Central Bank's Survey of Professional Forecasters (ECB's SPF) is gaining prominence in recent years not only for policy analysis (ECB 2014a(ECB , 2014c but also for research (Lyziak and Paloviita 2016;Glas and Hartmann 2016;Kenny and Melo Fernandes 2016;Poncela and Senra 2016;Abel et al 2015;Bowles et al 2010;Conflitti 2011;Kenny et al 2012). The SPF was launched in the first quarter of 1999 and collects expectations of inflation, GDP growth and the unemployment rate in the euro area for different forecast horizons.…”