DP6536 Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area than in the United States?

Author(s): Meredith J Beechey , Benjamin K Johannsen , Andrew Levin

Publication Date: October 2007

Keyword(s): central bank communication , ECB , euro-area inflation , inflation compensation

JEL(s): E31 , E52 , E58

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP6536.asp

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.