Working Paper: NBER ID: w11792
Authors: Linda S. Goldberg; Michael W. Klein
Abstract: The perceptions of a central bank's inflation aversion may reflect institutional structure or, more dynamically, the history of its policy decisions. In this paper, we present a novel empirical framework that uses high frequency data to test for persistent variation in market perceptions of central bank inflation aversion. The first years of the European Central Bank (ECB) provide a natural experiment for this model. Tests of the effect of news announcements on the slope of yield curves in the euro-area, and on the euro/dollar exchange rate, suggest that the market's perception of the policy stance of the ECB during its first six years of operation significantly evolved, with a belief in its inflation aversion increasing in the wake of its monetary tightening. In contrast, tests based on the response of the slope of the United States yield curve to news offer no comparable evidence of any change in market perceptions of the inflation aversion of the Federal Reserve.
Keywords: Central Bank; Inflation Aversion; Credibility; European Central Bank
JEL Codes: F3; E5; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB's monetary tightening actions (E52) | market perceptions of inflation aversion (E31) |
| market perceptions of inflation aversion (E31) | responsiveness of asset prices to inflation news (E31) |
| ECB's actions (E52) | market perceptions of inflation aversion (E31) |
| ECB's credibility (E58) | asset price responses to inflation news (E31) |