The Joint Dynamics of U.S. and Euro-Area Inflation Rates: Expectations and Time-varying Uncertainty

58 Pages Posted: 14 Apr 2017

See all articles by Olesya V. Grishchenko

Olesya V. Grishchenko

Board of Governors of the Federal Reserve System

Sarah Mouabbi

Banque de France

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Date Written: February 2017

Abstract

We use several U.S. and euro-area surveys of professional forecasters to estimate a dynamic factor model of inflation with time-varying uncertainty. We obtain survey-consistent distributions of future inflation at any horizon, both in the United States and in the euro area. Our methodology allows us to compute, in closed form, survey-consistent measures of inflation expectations, inflation uncertainty, inflation expectations anchoring, deflation probabilities and U.S. and euro-area inflation co-movements. Our results suggest strong commonalities between inflation dynamics in the two economies.

Keywords: inflation, surveys of professional forecasters, dynamic factor model with stochastic volatility, term structure of inflation expectations and inflation uncertainty, anchoring of inflation expectations

JEL Classification: C32, E31, E44

Suggested Citation

Grishchenko, Olesya V. and Mouabbi, Sarah and Renne, Jean-Paul, The Joint Dynamics of U.S. and Euro-Area Inflation Rates: Expectations and Time-varying Uncertainty (February 2017). Banque de France Working Paper No. 622. Available at SSRN: https://ssrn.com/abstract=2952315 or http://dx.doi.org/10.2139/ssrn.2952315

Olesya V. Grishchenko

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2981 (Phone)

Sarah Mouabbi (Contact Author)

Banque de France ( email )

Paris
France

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

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