Inflation anchoring in the euro area

Christian Speck

No 04/2016, Discussion Papers from Deutsche Bundesbank

Abstract: 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.

Keywords: Inflation Anchoring; Inflation Expectations; Inflation-Linked Swaps; Event Study; Central Banking (search for similar items in EconPapers)
JEL-codes: E31 E44 G12 G14 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in 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 (9)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:042016

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