IDEAS home Printed from https://ideas.repec.org/a/eee/jimfin/v64y2016icp88-103.html
   My bibliography  Save this article

Internal or external devaluation? What does the EC Consumer Survey tell us about macroeconomic adjustment in the Euro area?

Author

Listed:
  • Arnold, Ivo J.M.
  • Soederhuizen, Beau

Abstract

This paper explores the dynamics of national inflation expectations within the euro area during the recent crisis. Using the European Commission's Consumer Survey, we find that the strong anchoring of area-wide inflation expectations, which is typically found in the literature, does not extend to individual member states. We also measure the effect of the crisis on national inflation expectations using sovereign bond spreads and find that increases in sovereign risk have a significant negative effect on inflation expectations. This suggests that consumers expect their country to adjust through a process of internal devaluation. In contrast, we find no evidence that tensions in the sovereign bond markets increase national inflation expectations, as one would be expect under an exit or breakup scenario.

Suggested Citation

  • Arnold, Ivo J.M. & Soederhuizen, Beau, 2016. "Internal or external devaluation? What does the EC Consumer Survey tell us about macroeconomic adjustment in the Euro area?," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 88-103.
    • Handle: RePEc:eee:jimfin:v:64:y:2016:i:c:p:88-103
    DOI: 10.1016/j.jimonfin.2016.02.011
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0261560616000358
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jimonfin.2016.02.011?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:zbw:bofrdp:2004_021 is not listed on IDEAS
    2. Patrick Honohan & Philip R. Lane, 2003. "Divergent inflation rates in EMU [‘European financial integration and equity returns: a theory-based assessment’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 18(37), pages 357-394.
    3. Ivo J.M. Arnold & Jan J.G. Lemmen, 2008. "Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(2), pages 325-346, July.
    4. Michael Ehrmann & Marcel Fratzscher & Refet S Güürkaynak & Eric T Swanson, 2011. "Convergence and Anchoring of Yield Curves in the Euro Area," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 350-364, February.
    5. Jan Marc Berk, 1999. "Measuring inflation expectations: a survey data approach," Applied Economics, Taylor & Francis Journals, vol. 31(11), pages 1467-1480.
    6. van der Cruijsen, Carin & Demertzis, Maria, 2011. "How anchored are inflation expectations in EMU countries?," Economic Modelling, Elsevier, vol. 28(1), pages 281-298.
    7. William Branch & George Evans, 2011. "Monetary policy and heterogeneous expectations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 47(2), pages 365-393, June.
    8. Jan Marc Berk & Gerbert Hebbink, 2006. "The anchoring of European inflation expectations," DNB Working Papers 116, Netherlands Central Bank, Research Department.
    9. Meredith J. Beechey & Benjamin K. Johannsen & Andrew T. Levin, 2011. "Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area Than in the United States?," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 104-129, April.
    10. Maritta Paloviita, 2006. "Inflation Dynamics in the Euro Area and the Role of Expectations," Empirical Economics, Springer, vol. 31(4), pages 847-860, November.
    11. Francisco Dias & Cláudia Duarte & António Rua, 2010. "Inflation (mis)perceptions in the euro area," Empirical Economics, Springer, vol. 39(2), pages 353-369, October.
    12. Maritta Paloviita, 2004. "Inflation dynamics in the euro area and the role of expectations," Macroeconomics 0405015, University Library of Munich, Germany.
    13. Ben S. Bernanke, 2007. "Inflation expectations and inflation forecasting," Speech 306, Board of Governors of the Federal Reserve System (U.S.).
    14. Hofmann, Boris & Remsperger, Hermann, 2005. "Inflation differentials among the Euro area countries: Potential causes and consequences," Journal of Asian Economics, Elsevier, vol. 16(3), pages 403-419, June.
    15. Marina Glushenkova & Marios Zachariadis, 2014. "Understanding Law-of-One-Price Deviations across Europe Before and After the Euro," University of Cyprus Working Papers in Economics 01-2014, University of Cyprus Department of Economics.
    16. Jean Pisani-Ferry & Philippe Aghion & André Sapir & Alan Ahearne & Jürgen von Hagen, . "Coming of age- report on the euro area," Blueprints, Bruegel, number 11.
    17. Magnus Forsells & Geoff Kenny, 2004. "Survey Expectations, Rationality and the Dynamics of Euro Area Inflation," Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2004(1), pages 13-41.
    18. Berk, J.M & Swank, J., 2002. "Regional price adjustment in a monetary union: the case of EMU," Serie Research Memoranda 0016, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    19. Andrzej Toroj, 2009. "Macroeconomic adjustment and heterogeneity in the euro area," NBP Working Papers 54, Narodowy Bank Polski.
    20. Gerberding, Christina, 2001. "The information content of survey data on expected price developments for monetary policy," Discussion Paper Series 1: Economic Studies 2001,09, Deutsche Bundesbank.
    21. I. Arnold & C.J.M. Kool, 2004. "The Role of Inflation Differentials in Regional Adjustment: Evidence from the United States," Working Papers 04-13, Utrecht School of Economics.
    22. repec:bla:econom:v:55:y:1988:i:219:p:317-31 is not listed on IDEAS
    23. repec:fip:fedgsq:y:2007:i:jul10 is not listed on IDEAS
    24. repec:bla:econom:v:42:y:1975:i:166:p:123-38 is not listed on IDEAS
    25. Allington, Nigel FB & Kattuman, Paul A & Waldmann, Florian A, 2005. "One Market, One Money, One Price?," MPRA Paper 835, University Library of Munich, Germany.
    26. Servaas Deroose & Sven Langedijk & Werner Roeger, 2004. "Reviewing adjustment dynamics in EMU: from overheating to overcooling," European Economy - Economic Papers 2008 - 2015 198, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    27. Grothe, Magdalena & Lejsgaard Autrup, Søren, 2014. "Economic surprises and inflation expectations: Has anchoring of expectations survived the crisis?," Working Paper Series 1671, European Central Bank.
    28. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
    29. Kevin H. O'Rourke & Alan M. Taylor, 2013. "Cross of Euros," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 167-192, Summer.
    30. Jan Marc Berk & Job Swank, 2002. "Regional Price Adjustment in a Monetary Union," Tinbergen Institute Discussion Papers 02-077/2, Tinbergen Institute.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. Hayo, Bernd & Méon, Pierre-Guillaume, 2023. "Measuring Household Inflation Perceptions and Expectations: The Effect of Guided vs Non-Guided Inflation Questions," Journal of Macroeconomics, Elsevier, vol. 78(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ivo J.M. Arnold & Jan J.G. Lemmen, 2008. "Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(2), pages 325-346, July.
    2. Bonam, Dennis & Goy, Gavin, 2019. "Home biased expectations and macroeconomic imbalances in a monetary union," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 25-42.
    3. Jakob de Haan & Marco Hoeberichts & Renske Maas & Federica Teppa, 2016. "Inflation in the euro area and why it matters," DNB Occasional Studies 1403, Netherlands Central Bank, Research Department.
    4. Andrzej Toroj, 2009. "Macroeconomic adjustment and heterogeneity in the euro area," NBP Working Papers 54, Narodowy Bank Polski.
    5. Nautz, Dieter & Strohsal, Till & Netšunajev, Aleksei, 2019. "The Anchoring Of Inflation Expectations In The Short And In The Long Run," Macroeconomic Dynamics, Cambridge University Press, vol. 23(5), pages 1959-1977, July.
    6. Tomasz Lyziak, 2010. "Measuring consumer inflation expectations in Europe and examining their forward-lookingness," IFC Bulletins chapters, in: Bank for International Settlements (ed.), The IFC's contribution to the 57th ISI Session, Durban, August 2009, volume 33, pages 155-201, Bank for International Settlements.
    7. Filippo Natoli & Laura Sigalotti, 2018. "Tail Co-movement in Inflation Expectations as an Indicator of Anchoring," International Journal of Central Banking, International Journal of Central Banking, vol. 14(1), pages 35-71, January.
    8. Konstantins Benkovskis, 2008. "The Role of Inflation Expectations in the New EU Member States: Consumer Survey Based Results," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(07-08), pages 298-317, Oktober.
    9. Speck, Christian, 2016. "Inflation anchoring in the euro area," Discussion Papers 04/2016, Deutsche Bundesbank.
    10. Sarah M. Lein & Thomas Maag, 2011. "The Formation Of Inflation Perceptions: Some Empirical Facts For European Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(2), pages 155-188, May.
    11. repec:hum:wpaper:sfb649dp2015-028 is not listed on IDEAS
    12. Constantinos Alexiou, 2011. "When the Bough Breaks Making Sense of the Greek Economic Waterloo'," International Journal of Economics and Financial Issues, Econjournals, vol. 1(3), pages 123-132, September.
    13. Dennis Bonam & Gabriele Galati & Irma Hindrayanto & Marco Hoeberichts & Anna Samarina & Irina Stanga, 2019. "Inflation in the euro area since the Global Financial Crisis," DNB Occasional Studies 1703, Netherlands Central Bank, Research Department.
    14. Strohsal, Till & Melnick, Rafi & Nautz, Dieter, 2016. "The time-varying degree of inflation expectations anchoring," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 62-71.
    15. Pedro Pires Ribeiro & José Dias Curto, 2018. "How do zero-coupon inflation swaps predict inflation rates in the euro area? Evidence of efficiency and accuracy on 1-year contracts," Empirical Economics, Springer, vol. 54(4), pages 1451-1475, June.
    16. Jan Marc Berk & Job Swank, 2007. "Regional real exchange rates and Phillips curves in monetary unions - Evidence from the US and EMU," DNB Working Papers 147, Netherlands Central Bank, Research Department.
    17. Speck, Christian, 2016. "Inflation Anchoring in the Euro Area," VfS Annual Conference 2016 (Augsburg): Demographic Change 145697, Verein für Socialpolitik / German Economic Association.
    18. Jonas Dovern & Geoff Kenny, 2020. "Anchoring Inflation Expectations in Unconventional Times: Micro Evidence for the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 16(5), pages 309-347, October.
    19. Mrs. Hanan Morsy & Ms. Florence Jaumotte, 2012. "Determinants of Inflation in the Euro Area: The Role of Labor and Product Market Institutions," IMF Working Papers 2012/037, International Monetary Fund.
    20. repec:hum:wpaper:sfb649dp2016-015 is not listed on IDEAS
    21. Christian Proaño Acosta, 2007. "Inflation Differentials and Business Cycle Fluctuations in the European Monetary Union," IMK Working Paper 05-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    22. Hartmann, Philipp & Smets, Frank, 2018. "The first twenty years of the European Central Bank: monetary policy," Working Paper Series 2219, European Central Bank.

    More about this item

    Keywords

    Inflation expectations; Anchoring; Macroeconomic adjustment mechanism; Euro crisis;
    All these keywords.

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    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:eee:jimfin:v:64:y:2016:i:c:p:88-103. 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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    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.