The Long-Term Distribution of Expected Inflation in the Euro Area: What has Changed Since the Great Recession?

44 Pages Posted: 3 Feb 2017

See all articles by Jonas Dovern

Jonas Dovern

Kiel Institute for the World Economy

Geoff Kenny

European Central Bank (ECB)

Date Written: January 25, 2017

Abstract

This paper analyses the distribution of long-term inflation expectations in the euro area using individual density forecasts from the ECB Survey of Professional Forecasters. We exploit the panel dimension in this dataset to examine whether this distribution became less stable following the Great Recession, subsequent sovereign debt crisis and period when the lower bound on nominal interest rates became binding. Our results suggest that the distribution did change along several dimensions. We document a small downward shift in mean long-run expectations toward the end of our sample although they remain aligned with the ECB definition of price stability. More notably, however, we identify a trend toward a more uncertain and negatively skewed distribution with higher tail risk. Another main finding is that key features of the distribution are influenced by macroeconomic news, including the ex post historical track record of the central bank.

Keywords: inflation expectations, density forecasts, ECB, euro area

JEL Classification: E31, E58

Suggested Citation

Dovern, Jonas and Kenny, Geoff, The Long-Term Distribution of Expected Inflation in the Euro Area: What has Changed Since the Great Recession? (January 25, 2017). ECB Working Paper No. 1999, Available at SSRN: https://ssrn.com/abstract=2910913

Jonas Dovern (Contact Author)

Kiel Institute for the World Economy ( email )

Duesternbrooker Weg 120
Kiel, Schleswig-Hosltein 24105
Germany
+49-431-8814-266 (Phone)

HOME PAGE: http://www.ifw-members.ifw-kiel.de/Members/jonas_dovern_ifw_kiel_de/jonas_dovern_ifw_kiel_de

Geoff Kenny

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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