How well-anchored are long-term inflation expectations?

BIS Working Papers  |  No 869  | 
08 June 2020
by Richhild Moessner and Előd Takáts
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Focus

We investigate how stable long-term inflation expectations were in the 1996-2019 period. Stable, well anchored long-term inflation expectations imply that the public believes the central bank can achieve its target. Yet, inflation ran below the targeted level in many countries for a long time. Furthermore, many central banks have hit the effective lower bound for interest rates and cannot lower them further.

Contribution

Our contribution is to use a panel framework to consider the effects of short-term inflation expectations on long-term inflation expectations. We do this for both advanced and emerging economies. We also consider the effect of persistent deviations of inflation from target. In addition, we contribute to the policy debate about the anchoring of inflation expectations.

Findings

Long-term inflation expectations are less well anchored in emerging market economies than in advanced ones. This is true both before and after the global financial crisis. Furthermore, persistent deviations of inflation from target affect long-term inflation expectations in advanced economies. Yet, persistent deviations do not have a stronger impact at the effective lower bound. Moreover, we find evidence for asymmetry. Higher than targeted inflation has a larger impact than lower than targeted inflation.

Abstract

We study the anchoring properties of long-term inflation expectations in emerging and advanced economies, as a measure of monetary policy credibility. We proxy anchoring by how short-term expectations relate to long-term inflation expectations. We find that long-term inflation expectations are less well anchored in emerging than in advanced economies for the period 1996-2019. These findings do not significantly differ between before and after the global financial crisis or away from and at the effective lower bound. We also find that persistent deviations of inflation from target affect long-term inflation expectations in advanced economies. Yet, persistent deviations do not have a stronger impact at the effective lower bound. Moreover, we find evidence for asymmetry: higher than targeted inflation has a larger impact on long-term inflation expectations.

JEL classification: E31, E58

Keywords: inflation expectations, anchoring, ZLB, monetary policy credibility