The common and specific components of inflation expectations across European countries

Shi Chen (), Wolfgang Härdle and Weining Wang
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Shi Chen: Karlsruher Institut für Technologie
Weining Wang: York University

Empirical Economics, 2022, vol. 62, issue 2, No 10, 553-580

Abstract: Abstract Inflation expectations (IEs) are often considered to be an important determinant of actual inflation in modern economic theory. This paper studies IE estimates across several European countries, focusing particularly on the key factors that determine the IE dynamics. We first use an arbitrage-free term structure model with both nominal and inflation-indexed bond yields to efficiently obtain the estimates for country-specific IEs. Second, we study the common and specific components of IE estimates in a multi-country factor model framework. We find that the estimated common IE component is an important driver for each country of interest especially for those EMU countries and can be used by central banks as a tool to help anchor IEs and enhance the conduct of monetary policy.

Keywords: Inflation expectations; Joint yield-curve modeling; Factor model; Common trend; Spatial–temporal copulas (search for similar items in EconPapers)
JEL-codes: C02 C13 C38 E31 E43 (search for similar items in EconPapers)
Date: 2022
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Working Paper: The common and speci fic components of inflation expectation across European countries (2020)
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DOI: 10.1007/s00181-021-02027-1

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