Tail Co-movement in Inflation Expectations as an Indicator of Anchoring

Filippo Natoli and Laura Sigalotti
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Laura Sigalotti: Bank of Italy

International Journal of Central Banking, 2018, vol. 14, issue 1, 35-71

Abstract: We analyze the degree of anchoring of inflation expectations in the euro area during the post-crisis period, with a focus on the time span from 2014 onwards when long-term beliefs have substantially drifted away from the policy target. Using a new estimation technique, we look at tail co-movements between short- and long-term distributions of inflation expectations, estimated from daily quotes of inflation derivatives. We find that, during 2014, average correlations between short- and long-term inflation expectations rose sharply; moreover, negative tail events impacting short-term beliefs have been increasingly channeled to long-term views, triggering both downward revisions in expectations and upward changes in uncertainty. Overall, our results signal a risk of downside de-anchoring of long-term inflation expectations.

Date: 2018
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Working Paper: Tail co-movement in inflation expectations as an indicator of anchoring (2017)
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