IDEAS home Printed from https://ideas.repec.org/a/onb/oenbmp/y2010i1b2.html
   My bibliography  Save this article

Shocks, the Crisis and Uncertainty about Future Inflation: Theory and Evidence for the Euro Area

Author

Abstract

This study is motivated by the recent increase in volatility of both inflation and inflation expectations, triggered initially by the surge in commodity prices and more recently by the global economic crisis. While inflation uncertainty rose only moderately in response to the commodity and energy price shock in 2007, the financial and economic crisis triggered a dramatic increase across all types of agents, which was also reflected in historically large forecast errors. During the final months of 2009, both inflation expectations and uncertainty returned to more moderate levels. Uncertainty about future inflation may pose a problem both for monetary policy and for economic efficiency at large. Our study shows that various strands of economic theory offer quite diverse explanations for the mechanisms behind the formation of inflation expectations and the associated uncertainty. Our econometric estimates suggest that behavioral heuristics and information constraints or bounded rationality may indeed influence agents’ uncertainty about future inflation. For instance, both consumers and professional forecasters seem to invest more effort in forming expectations about future inflation if and when inflation developments become more salient. However, in the case of consumers faced with very large inflation shocks, this effect seems to be dampened by other behaviors. In contrast to consumers, professional forecasters’ uncertainty about future inflation reacts to news about the business cycle and monetary policy, which points to their use of a richer data set and more sophisticated models in forming inflation expectations.

Suggested Citation

  • Ernest Gnan & Johannes Langthaler & Maria Teresa Valderrama, 2010. "Shocks, the Crisis and Uncertainty about Future Inflation: Theory and Evidence for the Euro Area," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 26-52.
  • Handle: RePEc:onb:oenbmp:y:2010:i:1:b:2
    as

    Download full text from publisher

    File URL: https://www.oenb.at/dam/jcr:968c059a-5463-43cb-a375-82c523207d91/mop_2010_q1_analyses_02_tcm16-190387.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gary Koop & Luca Onorante, 2011. "Estimating Phillips Curves in Turbulent Times using the ECBs Survey of Professional Forecasters," Working Papers 1109, University of Strathclyde Business School, Department of Economics.
    2. Cristina Conflitti & Roberta Zizza, 2021. "What’s behind firms’ inflation forecasts?," Empirical Economics, Springer, vol. 61(5), pages 2449-2475, November.
    3. Concetta Rondinelli & Roberta Zizza, 2020. "Spend today or spend tomorrow? The role of inflation expectations in consumer behaviour," Temi di discussione (Economic working papers) 1276, Bank of Italy, Economic Research and International Relations Area.
    4. Derek P McCormack, 2012. "Governing Economic Futures through the War on Inflation," Environment and Planning A, , vol. 44(7), pages 1536-1553, July.
    5. Cristina Conflitti & Roberta Zizza, 2018. "What�s behind firms� inflation forecasts?," Questioni di Economia e Finanza (Occasional Papers) 465, Bank of Italy, Economic Research and International Relations Area.
    6. Fuest, Angela & Schmidt, Torsten, 2020. "Inflation expectation uncertainty in a New Keynesian framework," Ruhr Economic Papers 867, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.

    More about this item

    Keywords

    inflation expectations; uncertainty; behavioral economics; heterogeneous agents;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:onb:oenbmp:y:2010:i:1:b:2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Rita Glaser-Schwarz (email available below). General contact details of provider: https://edirc.repec.org/data/oenbbat.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.