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Inflation Dynamics in the Euro Area and the Role of Expectations
Tiivistelmä: Euroalueen inflaatiodynamiikka ja odotusten merkitys : lisätuloksia.
Inflation Dynamics in the Euro Area and the Role of Expectations
Tiivistelmä: Euroalueen inflaatiodynamiikka ja odotusten merkitys.
The Role of Expectations in the Inflation Process in the Euro Area
This paper analyses the role of inflation expectations in the euro area. On one hand, the question is how inflation expectations affect both inflation and output, and, on the other hand, how inflation expectations reflect developments in these variables. The analyses make use of a simple VAR model of inflation, inflation expectations and the output gap that allows for an analysis of the dynamic interrelationship between these variables. This model is estimated on aggregate euro area data, pooled euro area country data and individual country data for the period 1979-2003. The empirical results give strong support for the idea that inflation expectations are the key ingredient of the inflationary process for the whole euro area and for most individual countries as well. Inflation expectations also have a significant negative impact on output. As for the determination of inflation expectations, it turns out that they are relatively persistent, almost as persistent as output. Even so, and especially in the medium term, inflation expectations adapt to developments in both output and (actual) inflation.
Responsiveness of Consumers' Medium-Term Inflation Expectations
Medium-term inflation expectations of the public are a key variable of interest to any modern central bank responsible for price stability. Using the new ECB Consumer Expectations Survey, this paper investigates revisions of medium-term inflation expectations. We provide robust evidence that consumers adjust medium-term inflation views in response to changes in short-term inflation expectations and, to a lesser degree, to changes in inflation perceptions. We find that the strong adverse Covid-19 shock contributed to an increase in consumer inflation expectations. We show that both higher financial literacy and higher trust in the central bank reduce responsiveness of medium-term inflation expectations, which supports their stability. Our results increase understanding of expectations formation, which is essential for medium-term oriented monetary policy.
