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Inflation Expectations, Central Bank Credibility and the Global Financial Crisis

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  • Petra Gerlach-Kristen
  • Richhild Mössner
Abstract
Long-run inflation expectations should not respond to economic news if the central bank is seen as credibly committed to stabilising inflation. In this paper we find that since the onset of the global financial crisis, medium and long-term inflation expectations implied by inflation swaps in the euro area, United Kingdom and United States have become less responsive to actual inflation and changes in oil and food prices. This suggests that the credibility of the central banks in these economies remains intact, despite large increases in their balance sheets due to unconventional monetary policy measures and the introduction of explicit forward guidance at the zero lower bound. We also find an increase in autocorrelation of inflation expectations, which suggests that shocks have a longer-lasting impact than before the financial crisis.

Suggested Citation

  • Petra Gerlach-Kristen & Richhild Mössner, 2014. "Inflation Expectations, Central Bank Credibility and the Global Financial Crisis," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 150(II), pages 55-87, June.
    • Handle: RePEc:ses:arsjes:2014-ii-1
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    References listed on IDEAS

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    9. Richhild Moessner, 2015. "Reactions of real yields and inflation expectations to forward guidance in the United States," Applied Economics, Taylor & Francis Journals, vol. 47(26), pages 2671-2682, June.
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    Cited by:

    1. Galati, Gabriele & Gorgi, Zion & Moessner, Richhild & Zhou, Chen, 2018. "Deflation risk in the euro area and central bank credibility," Economics Letters, Elsevier, vol. 167(C), pages 124-126.
    2. Hamza Bennani, 2016. "Media Coverage and ECB Policy-Making: Evidence from a New Index," Working Papers hal-04141572, HAL.
    3. Dimitris Christelis & Dimitris Georgarakos & Tullio Jappelli & Maarten van Rooij, 2020. "Trust in the Central Bank and Inflation Expectations," International Journal of Central Banking, International Journal of Central Banking, vol. 16(6), pages 1-37, December.
    4. Hamza Bennani, 2016. "Media Coverage and ECB Policy-Making: Evidence from a New Index," EconomiX Working Papers 2016-38, University of Paris Nanterre, EconomiX.
    5. Dimitris Christelis & Dimitris Georgarakos & Tullio Jappelli & Maarten van Rooij, 2020. "Trust in the Central Bank and Inflation Expectations," International Journal of Central Banking, International Journal of Central Banking, vol. 16(6), pages 1-37, December.

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    More about this item

    Keywords

    Inflation expectations; central bank credibility; financial crisis;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G01 - Financial Economics - - General - - - Financial Crises

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