Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area than in the United States?

40 Pages Posted: 5 Jun 2008

See all articles by Meredith J. Beechey

Meredith J. Beechey

Monetary Policy Division, Sveriges Riksbank

Benjamin K. Johannsen

Board of Governors of the Federal Reserve System

Andrew T. Levin

affiliation not provided to SSRN

Date Written: October 2007

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, euro-area inflation, inflation compensation

JEL Classification: E31, E52, E58

Suggested Citation

Beechey, Meredith J. and Johannsen, Benjamin K. and Levin, Andrew, Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area than in the United States? (October 2007). CEPR Discussion Paper No. DP6536, Available at SSRN: https://ssrn.com/abstract=1140063

Meredith J. Beechey (Contact Author)

Monetary Policy Division, Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

Benjamin K. Johannsen

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andrew Levin

affiliation not provided to SSRN

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