Internal or external devaluation? What does the EC Consumer Survey tell us about macroeconomic adjustment in the Euro area?

Ivo Arnold () and Beau Soederhuizen

Journal of International Money and Finance, 2016, vol. 64, issue C, 88-103

Abstract: This paper explores the dynamics of national inflation expectations within the euro area during the recent crisis. Using the European Commission's Consumer Survey, we find that the strong anchoring of area-wide inflation expectations, which is typically found in the literature, does not extend to individual member states. We also measure the effect of the crisis on national inflation expectations using sovereign bond spreads and find that increases in sovereign risk have a significant negative effect on inflation expectations. This suggests that consumers expect their country to adjust through a process of internal devaluation. In contrast, we find no evidence that tensions in the sovereign bond markets increase national inflation expectations, as one would be expect under an exit or breakup scenario.

Keywords: Inflation expectations; Anchoring; Macroeconomic adjustment mechanism; Euro crisis (search for similar items in EconPapers)
JEL-codes: C16 C46 D84 E31 E58 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:64:y:2016:i:c:p:88-103

DOI: 10.1016/j.jimonfin.2016.02.011

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