Central bank credibility and anchoring of expected inflation: A European survey

This paper provides new evidence on the anchoring and formation of inflation expectations, especially at a time of financial and economic turmoil. We conduct a novel game experiment about the convergence of inflation related to the central bank target and credibility together with socio-economic variables. The analysis reveal four interesting results: First, we found evidence that the long-term inflation expectations are firmly anchored to the ECB's definition of price-stability. Second, the financial crisis as well as the sovereign debt crisis, however, triggered a substantial decline of credibility, and therefore higher 'real' inflation expectations. Third, participants changed their opinions about inflation in case of an inflation target rather little. Fourth, expectations exhibit a large degree of time-variance only in the game without an inflation target. Fifth, it turns out that inflation convergence towards equilibrium is incredible fast, in a game with an inflation target. All in all our paper shows novel insights of the inflation convergence process with and without inflation targets. Moreover, the paper uses an approach uniquely applied to the evaluation of inflation expectations, central bank credibility and anchoring of price-stability.