The Impact of Emu on Inflation Expectations

29 Pages Posted: 13 Apr 2004 Last revised: 14 Aug 2008

See all articles by Friedrich Heinemann

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research; University of Heidelberg - Alfred Weber Institute for Economics

Katrin Ullrich

Center for European Economic Research (ZEW)

Date Written: 2004

Abstract

This paper analyses the impact of the monetary regime change from the Bundesbank to the ECB in 1999 on inflation expectations. In the theoretical part, the Barro-Gordon model is used to derive the potential effect of a new central bank on inflation, inflation expectations and forecast errors. The econometric investigation is based on a flexible specification of expectation formation which allows both for rational and adaptive elements. Data on inflation expectations originate from the ZEW Financial Market Survey. The results indicate that the monetary regime change did not have a strong and lasting impact on the formation of inflation expectations and that the anti-inflationary credibility of both central banks is not perceived to differ significantly. However, the analysis also reveals that the years immediately before the start of EMU were characterised by a relatively large degree of uncertainty: in this time, market participants resorted to backward-looking expectations even more than usually. This is a plausible result because of the intitial uncertainty about the new central bank's characteristics. Once in charge of monetary policy the ECB was quickly successful to restore certainty about its true Bundesbank-like type.

Keywords: inflation expectations, credibility, ZEW Financial market survey, ECB, EMU, Carlson-Parkin

JEL Classification: E58, E31

Suggested Citation

Heinemann, Friedrich and Ullrich, Katrin, The Impact of Emu on Inflation Expectations (2004). ZEW - Centre for European Economic Research Discussion Paper No. 04-001, Available at SSRN: https://ssrn.com/abstract=527542 or http://dx.doi.org/10.2139/ssrn.527542

Friedrich Heinemann (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Katrin Ullrich

Center for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

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