International Spillovers in Inflation Expectations

32 Pages Posted: 16 Oct 2015

See all articles by Matteo Ciccarelli

Matteo Ciccarelli

European Central Bank (ECB)

Juan A. Garcia

European Central Bank (ECB)

Date Written: October 16, 2015

Abstract

This paper investigates the factors behind developments in inflation expectations in euro area, the U.S. and the U.K. over the sample 2005-2015. Our analysis unveils the presence of a quantitatively important spillover from euro area long-term inflation expectations onto international ones, in particular the U.S., since August 2014. This finding has some important implications. From a policy perspective, it contributes to explain the somewhat puzzling declines in financial indicators of inflation expectations since the autumn 2014 (Yellen, 2015). From a research perspective, our findings suggest that the relatively weak performance of term-structure models (and other econometric models) to explain developments in long-term inflation expectations in major economic areas over 2014-15 may be due to the omission of international factors. These two dimensions may well carry a significant weight on the on-going and future debate on monetary policy normalisation in major central banks.

Keywords: Inflation expectations, global inflation, international spillovers, deflation

JEL Classification: C11, C52, E31

Suggested Citation

Ciccarelli, Matteo and Garcia, Juan Angel, International Spillovers in Inflation Expectations (October 16, 2015). ECB Working Paper No. 1857, Available at SSRN: https://ssrn.com/abstract=2675051

Matteo Ciccarelli (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Juan Angel Garcia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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