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The drivers of market-based inflation expectations in the euro area and in the US

Author

Listed:
  • Christian Hoynck

    (Bank of Italy)

  • Luca Rossi

    (Bank of Italy)

Abstract

In this paper, we propose a methodology to assess the structural drivers of inflation expectations, as measured by inflation-linked swaps. To this end, we estimate a Bayesian Vector Autoregressive (BVAR) model for the euro area (EA) and the United States (US) on daily asset price movements in the two economies. Shocks are identified using sign and magnitude restrictions, also taking into account international spillovers. The inclusion of inflation expectations helps to clearly distinguish between supply and demand innovations. The findings suggest that over the course of 2021-23 inflation expectations in the US were steadily sustained by domestic demand, while in the EA they mostly reflected supply shocks, and only more recently a growing strength of demand factors. Our evidence also indicates that monetary policy shocks gradually contributed to lowering inflation expectations in both jurisdictions, although with different timing and vigour.

Suggested Citation

  • Christian Hoynck & Luca Rossi, 2023. "The drivers of market-based inflation expectations in the euro area and in the US," Questioni di Economia e Finanza (Occasional Papers) 779, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_779_23
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    References listed on IDEAS

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    4. Bruno, Valentina & Shin, Hyun Song, 2015. "Capital flows and the risk-taking channel of monetary policy," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 119-132.
    5. Venditti, Fabrizio & Veronese, Giovanni, 2020. "Global financial markets and oil price shocks in real time," Working Paper Series 2472, European Central Bank.
    6. Marek Jarociński & Peter Karadi, 2020. "Deconstructing Monetary Policy Surprises—The Role of Information Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(2), pages 1-43, April.
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    Cited by:

    1. Ignazio Visco, 2023. "Inflation Expectations and Monetary Policy in the Euro Area," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 51(2), pages 111-129, September.

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    More about this item

    Keywords

    inflation expectations; international transmission; monetary policy; high-frequency identification.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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