Friday, 16 March 2018: 9:30 AM
Inflation expectations play a crucial role for monetary policy transmission, having become even more important since the emergence of unconventional monetary policy. Based on survey data provided by Consensus Economics, we assess determinants of professional inflation expectations for the G7 economies. While previous research has focused on monetary policy spillovers based on global liquidity measures, we are able to illustrate that inflation expectations are also closely connected across countries. We emphasize the role of international spillovers in inflation expectations stemming from monetary policy decisions in the U.S. We also consider several possible determinants, such as changes in the path of monetary policy, oil price shocks and uncertainty measures. Based on a Bayesian VAR, we find significant evidence for international spillovers stemming from expectations about U.S. monetary policy based on impulse-response functions and forecast error decompositions. Such spillovers are often more important than changing expectations about domestic GDP. A somehow puzzling finding is that interest rate changes hardly affect inflation updates in the short run. Our estimates for the post-crisis period suggest that the importance of international spillovers has often increased over the recent period of unconventional monetary policy. Finally, we have illustrated that spillovers exist not only in the expectations mean but also focus on disagreement across inflation forecasters. This opens up the possibility to reduce (global) inflation uncertainty by monetary policy coordination. This is of particular importance when it comes to an exit from unconventional monetary policy. However, the fact that disagreement on future U.S. inflation is hardly explained within our framework and not affected by interest rate changes complicates this task.
JEL codes: C22, E31, E52
Keywords: Bayesian VAR, expectations, inflation, survey data, updating