No. 1025 - Tail comovement in option-implied inflation expectations as an indicator of anchoring

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by Sara Cecchetti, Filippo Natoli and Laura Sigalotti July 2015

We analyse the degree of anchoring of inflation expectations in the euro area. Using a new estimation technique, we look at the tail co-movement between the moments of short- and long-term distributions of inflation expectations, where those distributions are estimated from daily quotes of inflation derivatives.

We find that, since mid-2014, negative tail events impacting short-term inflation expectations have been increasingly channelled to long-term views, igniting both downward revisions in expectations and upward changes in uncertainty; instead, positive short-term tail events have left long-term moments mostly unaffected. This asymmetric behaviour may signal a disanchoring from below of long-term inflation expectations.

Forthcoming in: International Journal of Central Banking