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
Date Written: August 2013
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: Suggested Citation