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Inflation (De-)Anchoring in the Euro Area

Author

Listed:
  • Valentin Burban
  • Bruno De Backer
  • Andreea Liliana Vladu

Abstract

This article measures the degree of potential de-anchoring of inflation expectations in the euro area vis-à-vis the inflation objective of the European Central Bank (ECB). A no-arbitrage term structure model that allows for a time-varying long-term mean of inflation expectations, pt*, is applied to inflation-linked swap (ILS) rates, while taking into account survey-based inflation forecasts. Estimates of pt* have been close to 2% since the mid-2000s, indicating that long-term inflation expectations have overall remained well anchored to the ECB’s inflation objective. As this objective is however related to the "medium term", expectations components of various forward ILS rates are extracted: they appear to have been broadly anchored, with tentative signs of de-anchoring up to the two-year horizon. Using backcasted ILS rates, estimates of pt* are much above 2% in the early 1990s, but they converge to levels below 2% by the end of the decade when the ECB was established.

Suggested Citation

  • Valentin Burban & Bruno De Backer & Andreea Liliana Vladu, 2024. "Inflation (De-)Anchoring in the Euro Area," Working papers 965, Banque de France.
    • Handle: RePEc:bfr:banfra:965
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation-Linked Swap Rates; Surveys; No-Arbitrage; Shifting Endpoint; Inflation Expectations;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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