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Expectation spillovers and the return of inflation

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  • Ciccarelli, Matteo
  • García, Juan Angel

Abstract

Can the sharp rises in US inflation and inflation compensation in 2021 signal a return of inflation worldwide? In addition to international spillovers from US headline inflation, this paper provides evidence of quantitatively important effects from US inflation compensation not only on domestic but also on international inflation. Specifically, using the euro area as an example, we unveil an expectation channel that operates through inflation compensation markets and reinforces international spillovers from US inflation. These spillovers suggest that the implementation of average inflation targeting by the US Federal Reserve could be an important factor in the recovery of euro area and worldwide inflation.

Suggested Citation

  • Ciccarelli, Matteo & García, Juan Angel, 2021. "Expectation spillovers and the return of inflation," Economics Letters, Elsevier, vol. 209(C).
    • Handle: RePEc:eee:ecolet:v:209:y:2021:i:c:s0165176521003967
    DOI: 10.1016/j.econlet.2021.110119
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    References listed on IDEAS

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    1. Michael D. Bauer, 2015. "Inflation Expectations and the News," International Journal of Central Banking, International Journal of Central Banking, vol. 11(2), pages 1-40, March.
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    Cited by:

    1. Xindi Wang & Zeshui Xu & Xinxin Wang & Marinko Skare, 2022. "A review of inflation from 1906 to 2022: a comprehensive analysis of inflation studies from a global perspective," Oeconomia Copernicana, Institute of Economic Research, vol. 13(3), pages 595-631, September.
    2. Tiago Trancoso & Sofia Gomes, 2024. "How does inflation propagate among CPI components? Evidence from the euro area," Economics and Business Letters, Oviedo University Press, vol. 13(2), pages 58-67.
    3. Gefang, Deborah & Hall, Stephen G. & Tavlas, George S. & Wang, Yongli, 2024. "Quantifying spillovers among regions," Journal of International Money and Finance, Elsevier, vol. 140(C).
    4. Huber, Florian & Onorante, Luca & Pfarrhofer, Michael, 2024. "Forecasting euro area inflation using a huge panel of survey expectations," International Journal of Forecasting, Elsevier, vol. 40(3), pages 1042-1054.
    5. Aharon, David Y. & Qadan, Mahmoud, 2022. "Infection, invasion, and inflation: Recent lessons," Finance Research Letters, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    Inflation compensation; Global inflation; International spillovers;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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