The Great Recession and the Two Dimensions of European Central Bank Credibility

Timo Henckel (), Gordon Menzies and Daniel Zizzo

No 13, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: A puzzle from the Great Recession is an apparent mismatch between a fall in the persistence of European inflation rates, and the increased variability of expert forecasts of inflation. We explain this puzzle and show how country specific beliefs about inflation are still quite close to the European Central Bank target of 2% (what we call official target credibility) but the degree of anchoring to this target has gone down, implying an erosion of what we call anchoring credibility. A decline in anchoring credibility can explain increased forecast variance independently of any changes in inflation persistence, contrary to standard time series models.

Keywords: Central bank credibility; excess volatility; euro; inferential expectations; inflation (search for similar items in EconPapers)
JEL-codes: C51 D84 E31 E52 (search for similar items in EconPapers)
Pages: 28
Date: 2013-08-01
New Economics Papers: this item is included in nep-cba, nep-eec, nep-for, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: The Great Recession and the Two Dimensions of European Central Bank Credibility (2013)
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