Tail Co-movement in Inflation Expectations as an Indicator of Anchoring
by Filippo Natoli and Laura Sigalotti
Bank of Italy
We analyze the degree of anchoring of inflation expectations
in the euro area during the post-crisis period, with a focus on
the time span from 2014 onwards when long-term beliefs have
substantially drifted away from the policy target. Using a new
estimation technique, we look at tail co-movements between
short- and long-term distributions of inflation expectations,
estimated from daily quotes of inflation derivatives. We find
that, during 2014, average correlations between short- and
long-term inflation expectations rose sharply; moreover, negative
tail events impacting short-term beliefs have been increasingly
channeled to long-term views, triggering both downward
revisions in expectations and upward changes in uncertainty.
Overall, our results signal a risk of downside de-anchoring of
long-term inflation expectations.
JEL Codes: C14, C58, E31, E44, G13.
Full article (PDF, 37 pages, 2856 kb)