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Inflation Expectations and Monetary Policy in the Euro Area

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Fig. 1

Source: Eurostat database (European Commission, 2020), Istat database, (Italian National Institute of Statistics Data Warehouse, 2020), UK Office for National Statistics (2020) and U.S. Bureau of Labor Statistics (2020). Note: EA denotes the euro area (changing composition after 1999 and weighted average of the 11 countries participating to the start of Third Stage of the Economic and Monetary Union prior to that date)

Fig. 2

Source: Bloomberg (2022) database

Fig. 3

Source: Bloomberg (2022) database, Survey of Monetary Analysts (European Central Bank, 2022a) and Survey of Professional Forecasters (European Central Bank, 2022b). Note: (1) Inflation expectations and inflation risk premia are computed on the basis of the “fitted” inflation linked swap 5-year, 5 years forward (Cecchetti et al., 2022). Therefore, they do not necessarily add up to the “actual” data shown in the figure. (2) The ECB-SPF is conducted quarterly, the ECB-SMA shortly before each monetary policy meeting of the ECB Governing Council. In the ECB-SPF, “long term” is defined as 4 calendar years ahead in the Q1 and Q2 rounds and 5 calendar years ahead in the Q3 and Q4 rounds. In the ECB-SMA, “long term” is defined as the horizon over which the effects of all shocks will vanish and should be interpreted as around 10 years

Fig. 4

Source: Consumer Expectations Survey (European Central Bank, 2022c). Note: Inflation expectations are 12 months ahead and between 2 and 3 years ahead

Fig. 5

Source: Business and Consumer Surveys Database (European Commission, 2022). Note: Pricing intentions refer to the balance of the responses “increase” and “decrease” to the question on expected own price dynamics over the next three months

Fig. 6

Source: Bloomberg (2022) database and Survey of Monetary Analysts (European Central Bank, 2022a). Note: (1) ECB-SMA “long term” is defined as the horizon over which the effects of all shocks will vanish and should be interpreted as around 10 years. (2) Probabilities inferred from inflation options: π<0 (π<1) is the probability of inflation being smaller than 0 (1) on average in the next 5 years and π>3 (π>4) is the probability of inflation being larger than 3 (4) on average in the next 5 years; 50-day moving averages

Fig. 7

Source: Hoynck and Rossi (2023). Note: 5-year inflation swap rates; changes with respect to 3 January 2022

Fig. 8

Source: Statistical Data Warehouse (European Central Bank, 2022d)

Notes

  1. For a discussion on the role of expectations in modern monetary policy, see Bernanke (2007), for the United States, and European Central Bank (2021a), for the euro area.

  2. See Phillips (1958) and Samuelson and Solow (1960).

  3. See, among others, Klein and Goldberger (1955) and De Menil and Enzler (1972), as well as Ando and Brayton (1995).

  4. See Phelps (1967), Friedman (1968) and Lucas (1976). For a modern perspective on the Phillips curve, see Hazell et al. (2022).

  5. The low inflation observed in the last few years even in the face of strong labour markets has stimulated a wave of papers testing the decline (possibly to zero) of the slope of the Phillips curve. See, for example, Coibion and Gorodnichenko (2015), Blanchard (2016), Del Negro et al. (2020) and the references cited therein. For some limited evidence on the reversal, see Hobijn et al. (2023).

  6. See Wicksell (1898), Woodford (2003) and, for a recent discussion on the difficulties in using this concept as a guide for monetary policy, Visco (2022).

  7. For the United States see Bernanke (2022); for the euro area see European Central Bank (2021b).

  8. For early reviews of the literature, discussions of measurement problems, estimates of the formation mechanism and tests of rationality, see Visco (1984), Holden et al. (1985), Pesaran (1987).

  9. The Bank of Italy’s Survey on Inflation and Growth Expectations, in particular, builds on the progress made with the Mondo Economico survey (see Visco, 1984). It was launched in 1999 and conducted first with the newspaper Il Sole 24 Ore and, from 2018, by the Bank of Italy alone. The survey currently gathers, from a sample of 1,500 firms with at least 50 employees, quantitative expectations for consumer price inflation ‒ over one-year, two-year and three- to five-year horizons – in their own selling prices as well as their views on the macroeconomic outlook. 

  10. The earliest recorded inflation-indexed bonds were issued by the Commonwealth of Massachusetts in 1780. Emerging market countries began issuing inflation-index bonds in the 1960s and, in the 1980s, the United Kingdom was the first major developed country to introduce “linkers” to the market. For an overview see PIMCO (2023).

  11. See, for example, Romanchuk (2018).

  12. See Coibion et al. (2020), Rondinelli and Zizza (2020) and Fabiani et al. (2006).

  13. See, e.g., Weber et al. (2022).

  14. See Visco (1984) and Cukierman (1986).

  15. For a review of recent studies, see Coibion et al. (2018). 

  16. See D’Acunto et al. (2021) and Malmendier and Nagel (2016). 

  17. See Cukierman and Wachtel (1979).

  18. See Visco and Zevi (2021).

  19. See Cecchetti et al. (2022).

  20. See De Fiore et al. (2022) and Neri et al. (2022).

  21. See Neri et al. (2022).

  22. See Reis (2021)

  23. This section mostly follows two recent lectures given at the University of Warwick (Visco, 2023a) and at the Frankfurt School of Finance & Management (Visco, 2023b). On those occasions, I also focused on the nature of the current inflation and its different sources in the euro area and in the United States, on how the Russian invasion of Ukraine transformed a temporary cost-push shock into a persistent one, leading to an acceleration of monetary normalisation and on how the same dramatic event is at the root of the ECB/ Eurosystem forecasting errors observed over the course of 2022.

  24. See Brainard (1967). 

  25. See Ferrero et al. (2019).

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Acknowledgements

I thank Katherine Virgo and the International Atlantic Economic Society for the kind invitation to deliver this lecture. For their very useful contributions and comments, I also thank Rebecca Kelly, Pietro Rizza, Tiziano Ropele, Massimo Sbracia and Alessandro Secchi.

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    Ignazio Visco

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Visco, I. Inflation Expectations and Monetary Policy in the Euro Area. Atl Econ J 51, 111–129 (2023). https://doi.org/10.1007/s11293-023-09771-y

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