How Do Euro Area Inflation Expectations Evolve Over Time?
20 Pages Posted: 6 Mar 2008
Date Written: February 2008
Numerous event studies have documented that financial asset prices react very little to aggregated inflation releases in the euro area. The standard explanation for this non-response is that most of the national price data are already publicly available at the time of the final release. Contrary to the conventional wisdom, this paper shows that asset prices are indeed influenced by euro area inflation data releases. The responses are however limited to regional inflation outcomes published early in the monthly release cycle. On the basis of this finding, the paper proposes a Bayesian updating framework which suggests how investors go about when filtering out the news component in regional and national price releases. The model provides timely measures of aggregated inflation expectations for Germany and the euro area. The measures can hopefully serve as complements to standard survey-based expectations collected weeks ahead of the actual publication.
Keywords: Monetary policy, learning
JEL Classification: E52, E58, G14
Suggested Citation: Suggested Citation