Inflation anchoring in the euro area
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Did the decline in inflation rates from 2012 to 2015 and the low levels of market-based inflation expectations lead to de-anchored inflation dynamics in the euro area? This paper is the first time-varying event study to investigate the reaction of inflation-linked swap (ILS) rates - a market-based measure of inflation expectations - to macroeconomic surprises in the euro area. Compared to the pre-crisis period, surprises have a much stronger effect on spot ILS rates during the crisis. Medium-term forward ILS rates remain insensitive to news most of the time, which implies inflation anchoring. Only short periods of sensitivity on the part of medium-term forward ILS rates are identified at times of low inflation or recession. The sensitivity is lower over more distant forecast horizons such that medium-term sensitivity represents an inflation adjustment process and provides evidence for a de-anchoring of inflation expectations or a loss of credibility for the Eurosystem's policy target.
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Inflation anchoring in the euro area, Christian Speck
- Language
- Released
- 2016
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- Title
- Inflation anchoring in the euro area
- Language
- English
- Authors
- Christian Speck
- Publisher
- Deutsche Bundesbank, Press and Public Relations Division
- Released
- 2016
- ISBN10
- 3957292336
- ISBN13
- 9783957292339
- Series
- Discussion paper / Deutsche Bundesbank; Eurosystem
- Category
- Business and Economics
- Description
- Did the decline in inflation rates from 2012 to 2015 and the low levels of market-based inflation expectations lead to de-anchored inflation dynamics in the euro area? This paper is the first time-varying event study to investigate the reaction of inflation-linked swap (ILS) rates - a market-based measure of inflation expectations - to macroeconomic surprises in the euro area. Compared to the pre-crisis period, surprises have a much stronger effect on spot ILS rates during the crisis. Medium-term forward ILS rates remain insensitive to news most of the time, which implies inflation anchoring. Only short periods of sensitivity on the part of medium-term forward ILS rates are identified at times of low inflation or recession. The sensitivity is lower over more distant forecast horizons such that medium-term sensitivity represents an inflation adjustment process and provides evidence for a de-anchoring of inflation expectations or a loss of credibility for the Eurosystem's policy target.