Unconventional Monetary Policy and the Anchoring of Inflation Expectations

33 Pages Posted: 3 Feb 2017

See all articles by Matteo Ciccarelli

Matteo Ciccarelli

European Central Bank (ECB)

Juan A. Garcia

European Central Bank (ECB)

Carlos Montes-Galdon

European Central Bank

Date Written: January 25, 2017

Abstract

The effects of the unconventional monetary policy (UMP) measures undertaken by the U.S. Federal Reserve (and other major central banks) remain a crucial topic for research. This paper investigates their effects on the anchoring of long-term inflation expectations, a key dimension of UMP that has been largely overlooked. Our analysis provides two key insights. First, the anchoring of inflation expectations deteriorated significantly since late 2008. Second, the expansion of the Fed’s balance sheet contributed decisively to prevent and gradually reverse that de-anchoring during the Great Recession. Using a SVAR framework extended to incorporate policy news, we show that accounting for the predictable path of the balance sheet following the Fed’s asset purchase announcements is fundamental to properly assess the effects of UMP.

Keywords: inflation expectations, unconventional monetary policy, news shocks

JEL Classification: E43, E44, C52, C55

Suggested Citation

Ciccarelli, Matteo and Garcia, Juan Angel and Montes-Galdon, Carlos, Unconventional Monetary Policy and the Anchoring of Inflation Expectations (January 25, 2017). ECB Working Paper No. 1995, Available at SSRN: https://ssrn.com/abstract=2910910

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

Carlos Montes-Galdon

European Central Bank ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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