Consumers' Inflation Expectations and Monetary Policy in Europe

Abstract

This article analyses the effects of monetary policy decisions on inflation expectations of European consumers. Using a novel approach, I convert qualitative survey responses of consumers in various European countries into a quantitative time series of inflation expectations. I investigate the effects of unanticipated movements in interest rates and inflation on inflation expectations across European countries. I inter alia seek to explore whether the reaction differs of consumers in countries with more credible central banks than those in less credible countries.

Determinants of households’ inflation expectations in Japan and the United States

“…Fresh 6 See, for example, Sims (1980Sims ( , 1992, Bernanke and Mihov (1998), Christiano, Eichenbaum and Evans (1999), and Leduc et al (2007). As for applications to Japan, see Bayoumi (2001) and Miyao (2002).…”

“…This method assumes that respondents report a variable to rise or fall if their evaluation lies above or below a certain threshold; their answers are symmetric and normally distributed; and 1 How to measure inflation expectations is beyond the scope of this paper. See Carlson and Parkin (1975), Toyoda (1987), Kariya (1990), Berk (2000), and Pesaran and Weale (2006), chap. 14 for details of the methods used to transform qualitative survey data into quantitative estimates.…”

“…For Japan, Fukuda, Teruyama, and Toda (1991) finds a positive correlation between the dispersion of inflation expectations and the level of inflation rates. Recently, Berk (2000), Leduc, Sill, and Stark (2007), and Mehra and Herrington (2008) investigate the effect on inflation expectations of short-term nominal interest rates, which are the main instrument of monetary policy. 2 Among them, the most strongly related research is Leduc et al (2007).…”

Inflation Expectations

“…11 Simmons and Weiserbs (1992) and Berk ( , 2002 use this approach. 12 See Deutsche Bundesbank (2002Bundesbank ( , 2004.…”

Which Price Index for Eurozone Index-linked Bonds?

“…Early contributions are by Carlson and Parkin (1975) and Batchelor and Orr (1988). More recent contributions are by Reckwerth (1997), Berk (1999Berk ( , 2000, Gerberding (2001), Forsells and Kenny (2004) and Paloviita (2004). The main idea is to interpret the share of responses to each category as estimates of areas under the density function of aggregate inflation expectations (i.e.…”