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

CAMA Working Paper Series Paper 55/2013

29 Pages Posted: 22 Aug 2013

See all articles by Timo Henckel

Timo Henckel

Australian National University (Centre for Applied Macroeconomic Analysis)

Gordon Douglas Menzies

University of Technology Sydney (UTS) - School of Finance and Economics

Daniel John Zizzo

University of Queensland - School of Economics

Date Written: August 2013

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

JEL Classification: C51, D84, E31, E52

Suggested Citation

Henckel, Timo and Menzies, Gordon Douglas and Zizzo, Daniel John, The Great Recession and the Two Dimensions of European Central Bank Credibility (August 2013). CAMA Working Paper Series Paper 55/2013, Available at SSRN: https://ssrn.com/abstract=2313438 or http://dx.doi.org/10.2139/ssrn.2313438

Timo Henckel (Contact Author)

Australian National University (Centre for Applied Macroeconomic Analysis) ( email )

Canberra ACT 0200
Australia
+61-2-61255540 (Phone)
+61-2-61255570 (Fax)

HOME PAGE: http://apseg.anu.edu.au/staff/thenckel.php

Gordon Douglas Menzies

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia

Daniel John Zizzo

University of Queensland - School of Economics ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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