Measuring Inflation Anchoring and Uncertainty : A US and Euro Area Comparison

Grishchenko, Olesya V.; Mouabbi, Sarah; Renne, Jean-Paul

doi:10.17016/FEDS.2017.102

Working Paper

Measuring Inflation Anchoring and Uncertainty : A US and Euro Area Comparison

Abstract: We use several US and euro-area surveys of professional forecasters to estimate a dynamic factor model of inflation featuring time-varying uncertainty. We obtain survey-consistent distributions of future inflation at any horizon, both in the US and the euro area. Equipped with this model, we propose a novel measure of the anchoring of inflation expectations that accounts for inflation uncertainty. Our results suggest that following the Great Recession, inflation anchoring improved in the US, while mild de-anchoring occurred in the euro-area. As of our sample end, both areas appear to be equally anchored.

Keywords: Anchoring of inflation expectations; Dynamic factor model; Inflation; Stochastic volatility; Survey of Professional Forecasters (SPF); Term structure of inflation expectations and inflation uncertainty;

JEL Classification: C32; E41; E44;

https://doi.org/10.17016/FEDS.2017.102