The drivers of market-based inflation expectations in the euro area and in the US

Christian Hoynck () and Luca Rossi
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Christian Hoynck: Bank of Italy

No 779, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In this paper, we propose a methodology to assess the structural drivers of inflation expectations, as measured by inflation-linked swaps. To this end, we estimate a Bayesian Vector Autoregressive (BVAR) model for the euro area (EA) and the United States (US) on daily asset price movements in the two economies. Shocks are identified using sign and magnitude restrictions, also taking into account international spillovers. The inclusion of inflation expectations helps to clearly distinguish between supply and demand innovations. The findings suggest that over the course of 2021-23 inflation expectations in the US were steadily sustained by domestic demand, while in the EA they mostly reflected supply shocks, and only more recently a growing strength of demand factors. Our evidence also indicates that monetary policy shocks gradually contributed to lowering inflation expectations in both jurisdictions, although with different timing and vigour.

Keywords: inflation expectations; international transmission; monetary policy; high-frequency identification. (search for similar items in EconPapers)
JEL-codes: C32 C54 E31 E44 E52 (search for similar items in EconPapers)
Date: 2023-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: The drivers of market-based inflation expectations in the euro area and in the US (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_779_23

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