Title: The long-term distribution of expected inflation in the euro area: What has changed since the great recession
Authors: Geoff Kenny - European Central Bank (Germany) [presenting]
Jonas Dovern - Heidelberg University (Germany)
Abstract: The distribution of long-term inflation expectations in the euro area is analyzed by using individual density forecasts from the ECB Survey of Professional Forecasters. We exploit the panel dimension in this dataset to examine whether this distribution became less stable following the Great Recession, subsequent sovereign debt crisis and period when the lower bound on nominal interest rates became binding. Our results suggest that the distribution did change along several dimensions. In particular, we document a small downward shift in mean long-run expectations toward the end of our sample although they remain aligned with the ECB definition of price stability. More notably, however, we identify a trend toward a more uncertain and negatively skewed distribution with higher tail risk. Another main finding is that key features of the distribution are influenced by macroeconomic news, including the ex post historical track record of the central bank. Overall, our evidence provides strong grounds for recent monetary policy measures aimed at bringing inflation back to levels consistent with the ECBs price stability objective.