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Inflation (de-)anchoring in the euro area

Author

Listed:
  • Valentin Burban

    (Banque de France and Aix-Marseille University, Aix-Marseille School of Economics)

  • Andreaa Liliana Vladu

    (European Central Bank)

  • Bruno De Backer

    (National Bank of Belgium, Economics and Research Department)

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, πt*, is applied to inflation-linked swap (ILS) rates, while taking into account survey-based inflation forecasts. Estimates of πt* 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 πt* 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 & Andreaa Liliana Vladu & Bruno De Backer, 2024. "Inflation (de-)anchoring in the euro area," Working Paper Research 457, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:202409-457
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    File URL: https://www.nbb.be/en/articles/inflation-de-anchoring-euro-area
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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:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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