Working Paper: CEPR ID: DP6536
Authors: Meredith J. Beechey; Benjamin K. Johannsen; Andrew Levin
Abstract: This paper compares the recent evolution of long-run inflation expectations in the euro area and the United States, using evidence from financial markets and surveys of professional forecasters. Survey data indicate that long-run inflation expectations are reasonably well-anchored in both economies, but also reveal substantially greater dispersion across forecasters? long-horizon projections of U.S. inflation. Daily data on inflation swaps and nominal-indexed bond spreads - which gauge compensation for expected inflation and inflation risk - also suggest that long-run inflation expectations are more firmly anchored in the euro area than in the United States. In particular, surprises in macroeconomic data releases have significant effects on U.S. forward inflation compensation, even at long horizons, whereas macroeconomic news only influences euro area inflation compensation at short horizons.
Keywords: Central Bank Communication; ECB; Euroarea; Inflation; Inflation Compensation
JEL Codes: E31; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| differences in communication practices (L96) | anchoring of inflation expectations in euro area (E31) |
| macroeconomic surprises (E39) | U.S. forward inflation compensation (E31) |
| macroeconomic news (E60) | euro area inflation compensation (E31) |
| euro area inflation compensation (E31) | stability of expectations (D84) |
| U.S. inflation expectations (E31) | dispersion among forecasters (C53) |