What Can Break-Even Inflation Rates Tell Us about the Anchoring of Inflation Expectations in the Euro Area?

Wolfgang Lemke and Till Strohsal

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: We assess whether euro area inflation expectations, as measured by break-even inflation rates (BEIRs), have remained anchored during the financial crisis. Since autumn 2008, the volatility of BEIRs has increased considerably. We treat observed BEIRs as a sum of `genuine BEIRs' and additional `noise' components, the latter picking up influences related to market illiquidity or demand-supply imbalances, but not reflecting genuine inflation expectations and inflation risk premia. We estimate a bivariate VAR with short-term and long-term BEIRs, allowing for measurement noise in both. Anchoring of inflation expectations is analyzed by means of the pass-through of shocks from shorter to longer-term expectations. We find that, according to the pass-through results, inflation expectations remained well-anchored during the crisis period. Moreover, measurement noise accounts for up to 30% of the increase in volatility of BEIRs.

JEL-codes: C32 E31 E52 (search for similar items in EconPapers)
Date: 2013
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 (3)

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