The anchoring3/8/2023 “We investigate whether the intensity of the inflation pass-through has changed over time in different economies…In the euro area the co-movement of expectations is significantly different from zero between 19…The co-movement then decreases starting from 1996, and becomes null in 2001, highlighting the key role played by the adoption of the common currency and the credibility of the ECB in keeping inflation expectations well anchored. A 1% increase in one-year-ahead inflation expectations is associated with an increase of 0.49% for two-years-ahead inflation expectations and of 0.27% for five-years-ahead expectations.” For Japan the co-movement is always positive and statistically significant. “Inflation expectation pass-through is quite different across economies, at all horizons. If expectations are well anchored, then changes in short-run expectations should not be correlated with changes at longer horizons…The change in short-run inflation expectations is a proxy for macroeconomic news relevant for inflation.” “ analyzes the anchoring of inflation expectations for the four largest advanced economies from 1990 to March 2015…Our empirical analysis is based on semi-annual data on expected inflation, taken from the Consensus Economics surveys released in April and October of each year… We study the inflation expectation pass-through, defined as the link between short- and long-term inflation expectations, given respectively by one-year-ahead and five-years-ahead expectations. “We find that starting from the second half of 2008, inflation expectations in the euro area, unlike in the US and in the UK, have shown signs of a de-anchoring.” “The de-anchoring of inflation expectations…may explain why the Japanese authorities, stuck in a liquidity trap, were unsuccessful in their battle against deflation.” Survey-based evidence of de-anchoring of inflation expectations This is a concern especially when monetary policy is constrained by the zero lower bound: lower inflation expectations result in higher real interest rates, causing a monetary tightening that central banks are unable to counter by lowering nominal rates.” The resulting low inflation expectations may lead to destabilizing dynamics and self-fulfilling liquidity traps. “Recent evidence…has shifted the debate towards the risks entailed by actual inflation rates being persistently below the central banks’ target. Once incorporated into agents’ wage- and price-setting decisions, expectations drive actual inflation…Inflation expectations are firmly anchored if long-run expectations are stable over time, exhibit little cross-sectional dispersion, and are insensitive to macroeconomic news.” “Anchoring inflation expectations is a cornerstone of central banks’ monetary policy strategy. Why de-anchoring of inflation expectations is a great risk Headings, links and cursive text have been added. the first two sections are based on the Bank of Italy paper, the third on the DNB paper. The post also provides measures for tracking macroeconomic trends, particularly those related to broad economic uncertainty. This post ties in with our summary of non-conventional monetary policies and their role as essential tools for containing deflationary dynamics. Galatia, Gabriele, Zion Gorgi, Richhild Moessner and Chen Zhou (2016), “Deflation risk in the euro area and central bank credibility”, De Nederlandsche Bank, Working Paper No. De-anchoring increases the risk of actual deflation and may add to the risk premia on equity and credit.īuono, Ines and Sara Formai (2016), “The evolution of the anchoring of inflation expectations”, Banca D’Italia, Occasional Papers No. Two recent empirical studies highlight the risk that inflation expectations in the euro area are becoming de-anchored, similar to Japan. De-anchoring means that short-term price shocks can change long-term expectations. Importantly, the papers suggest medium- and short-term measures to track this de-anchoring.
0 Comments
Leave a Reply.AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |