Title: The role of inflation expectations in the transmission of monetary policy
Authors: Catalina Martinez Hernandez - Freie Universitaet Berlin/ DIW Berlin (Germany) [presenting]
Abstract: The role of inflation expectations for explaining heterogeneous monetary transmission in several countries of the Euro Area is empirically investigated. We analyze if imperfect information in the expectations-formation process explain the differences in the responses of inflation to conventional and unconventional monetary policy shocks. Since the number of variables that the ECB monitors is large, we concentrate on a data-rich environment framework and consider a Large Bayesian Proxy Vector Autoregression. We estimate this model by combining two strands of the literature on Bayesian Macroeconometrics: The Large Bayesian VAR and the Bayesian Proxy VAR. We find evidence that incomplete information in the formation of expectations could be considered as an explanation for the different responses of inflation to monetary policy in these countries. The policy implications are crucial for understanding the role of inflation expectations for monetary transmission especially in periods of unconventional tools.