Long-term inflation expectations and monetary policy in the euro area before the pandemic

Stefano Neri

European Economic Review, 2023, vol. 154, issue C

Abstract: Survey-based long-term inflation expectations in the euro area reached historically low levels at the end of 2019. A structural VAR analysis shows that the decline in long-term expectations exerted a downward pressure on inflation during the 2013–14 disinflation and in 2019. Counterfactual simulations show that the decrease in inflation would have been larger and output would have declined had the European Central Bank not responded to the fall in expectations. A small New Keynesian model, in which the private sector's estimate of the inflation target varies with inflation, can rationalise the VAR evidence.

Keywords: Long-term inflation expectations; Monetary policy; Structural VAR; New Keynesian model (search for similar items in EconPapers)
JEL-codes: C32 E31 E32 E37 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:154:y:2023:i:c:s0014292123000557

DOI: 10.1016/j.euroecorev.2023.104426

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