Deflation Risk in the Euro Area and Central Bank Credibility

29 Pages Posted: 7 Apr 2016

See all articles by Gabriele Galati

Gabriele Galati

De Nederlandsche Bank

Zion Gorgi

De Nederlandsche Bank

Richhild Moessner

Bank for International Settlements (BIS)

Chen Zhou

De Nederlandsche Bank; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: April 5, 2016

Abstract

This paper investigates how the perceived risk that the euro area will experience deflation has evolved over time, and what this risk implies for the credibility of the ECB. We use a novel data set on market participants’ perceptions of short- to long-term deflation risk implied by year-on-year options on forward inflation swaps. We investigate whether long-term inflation expectations have become de-anchored, by studying whether long-term deflation risk has been affected by changes in oil prices and by short-term deflation risk. Our analysis suggests that the anchoring properties of euro area inflation expectations have weakened, albeit in a still subtle way.

Keywords: Deflation, inflation expectations, monetary policy, financial crisis

JEL Classification: E31, E44, E52, E58

Suggested Citation

Galati, Gabriele and Gorgi, Zion and Moessner, Richhild and Zhou, Chen, Deflation Risk in the Euro Area and Central Bank Credibility (April 5, 2016). De Nederlandsche Bank Working Paper No. 509. Available at SSRN: https://ssrn.com/abstract=2759266 or http://dx.doi.org/10.2139/ssrn.2759266

Gabriele Galati (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Zion Gorgi

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Richhild Moessner

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Chen Zhou

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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