January 2018 issue contents
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)