Are Long-Term Inflation Expectations Well-Anchored? Evidence from the Euro Area and the United States

Abstract

This paper analyses the anchoring, i.e. stability, of long-term inflation expectations, as well as further moments of the distribution, as perceived by the professional forecasters in the euro area and the US. Evaluation is initially performed on the basis of sensitivity to innovations to observed inflation, short- and medium-term individual forecast news. News are defined in a subjective sense and derived from revisions to shorter-term fixed-target forecasts. The assessment tests for presence of non-linear effects, including regime changes during disinflation in the US in the 90s, and the recent financial crisis. Secondly, anchoring is evaluated in terms of level evolution, based on structural non-linear and non-Gaussian learning models, used to uncover the presence of common trend, underlying the long-term dynamics of inflation, individual expectations and uncertainty. The findings suggest relatively well-anchored expectations. As regards sensitivity, point expectations in the euro area are perfectly anchored. Although there is presence of non-stationary common process underlying individual expectations and inflation realisations, most forecasters project the ex-ante long-term considerably below trend inflation, a phenomenon documented and named here collective stabilisation bias. Long-term uncertainty proved unrelated to both level and changes in the inflation process. In the US there is higher sensitivity to the shorter term, which has diminished significantly after 1999, possibly contributing to stationarity in the underlying inflationary process and absence of collective bias. Both currency areas demonstrate remarkable resilience to shocks during the financial markets’ crisis.