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How Do Inflation Expectations Form? New Insights from a High-Frequency Survey

47 Pages Posted: 29 Oct 2011  

Gabriele Galati

De Nederlandsche Bank

Peter Heemeijer

University of Amsterdam - Department of Quantitative Economics (KE)

Richhild Moessner

Bank for International Settlements (BIS)

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Date Written: March 1, 2011

Abstract

We provide new insights on the formation of inflation expectations – in particular at a time of great financial and economic turmoil – by evaluating results from a survey conducted from July 2009 through July 2010. Participants in this survey answered a weekly questionnaire about their short-, medium- and long-term inflation expectations. Participants received common information sets with data relevant to euro area inflation. Our analysis of survey responses reveals several interesting results. First, our evidence is consistent with long-term expectations having remained well anchored to the ECB’s definition of price stability, which acted as a focal point for long-term expectations. Second, the turmoil in euro area bond markets triggered by the Greek fiscal crisis influenced short- and mediumterm inflation expectations but had only a very small impact on long-term expectations. By contrast, long-term expectations did not react to developments of the euro area wide fiscal burden. Third, participants changed their expectations fairly frequently. The longer the horizon, the less frequent but larger these changes were. Fourth, expectations exhibit a large degree of time-variant non-normality. Fifth, inflation expectations appear fairly homogenous across groups of agents at the shorter horizon but less so at the medium- and long-term horizons.

Keywords: Inflation expectations, monetary policy, crisis

JEL Classification: E31, E32, E37, E52, C53

Suggested Citation

Galati, Gabriele and Heemeijer, Peter and Moessner, Richhild, How Do Inflation Expectations Form? New Insights from a High-Frequency Survey (March 1, 2011). De Nederlandsche Bank Working Paper No. 283. Available at SSRN: https://ssrn.com/abstract=1950594 or http://dx.doi.org/10.2139/ssrn.1950594

Gabriele Galati (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Peter Heemeijer

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Richhild Moessner

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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