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Understanding inflation dynamics requires an understanding of the underlying concept and how it is measured. Inflation is defined as a process of continuously rising prices and falling purchasing power. In other words, a general and broad-based increase in the price of goods and services over an extended period. The main objective of central banks is to keep prices stable, to preserve the integrity and purchasing power of people's money. The most common inflation indicator measures the average change ...

On 26 July 2012, then ECB President Mario Draghi gave the so-called “whatever it takes” speech, today widely considered as the turnaround point in the European sovereign debt crisis. Shortly after, the European Central Bank (ECB) announced the details of its outright monetary transactions programme (OMT) tool. The speech, together with the OMT announcement, were enough to remove re-denomination risk from sovereign bond markets. OMT was never actually used. 10 years after, in a context of record-high ...

On 24 February 2022, Russia launched an invasion of Ukraine. The war itself, as well as related sanctions and countersanctions are expected to have a significant impact on the euro area economy. This paper summarises the recent monetary policy decisions of the European Central Bank (ECB)'s Governing Council and outlines some policy issues and challenges that might arise in the context of the war, related to price stability, financial stability, climate and energy policies, ECB/Eurosystem staff projections ...

A new database on exceptional fiscal spending adopted during the COVID-19 crisis is presented for 14 EU countries. The composition and evolution of fiscal measures differ across countries. We analyse (a) whether national economic characteristics determined the type of fiscal response adopted and (b) how the different fiscal measures affected the macroeconomic outcomes and consumer confidence. We assess whether measures have been sufficiently targeted and make recommendations as to which adjustments ...

We examine the role of inflation expectations in conditioning monetary policy, addressing three of its facets. The first concerns the channels through which inflation expectations impinge upon actual inflation, and their policy implications. The second facet regards the technical and empirical issues involved in keeping track of inflation expectations for monetary policy purposes. The final facet is an assessment of inflation expectations vis-à-vis the current upsurge of inflation, wondering whether ...

The ECB considers communication a critical instrument in its policy toolkit. Since its creation, the ECB has devoted significant attention to the mechanisms through which it conveys to the public information relevant to its decision-making and ensures its accountability. This policy briefing assesses whether existing ECB communication practises are adequate to continue ensuring the effectiveness and accountability of monetary policy in light of the recent and upcoming challenges that the ECB confronts ...

This paper discusses theory and evidence on inflation expectations. While near-term measures of expected inflation in the euro area have increased, forecasters and financial markets expect inflation to decline back to the ECB’s target by later this year. The paper provides some sceptical arguments in relation to the prominence given to measure of inflation expectations in monetary policy circles. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies ...

Inflation expectations: quo vadis?

Indgående analyse 31-01-2022

Against the backdrop of the recent surge in inflation, we discuss available measures of inflation expectations and implications for monetary policy in the euro area. While long-term expectations are currently still in line with the ECB’s inflation target, the risk of a further rise increases should actual inflation remain high for an extended period of time. If expectations de-anchor the ECB may face difficult trade-offs. This paper was provided by the Policy Department for Economic, Scientific ...

Inflation expectations: models and measures

Indgående analyse 31-01-2022

Inflation expectations are key inputs into monetary policy, but they also represent one of the most difficult variables to measure. Inflation expectations are particularly difficult to pin down in a low inflation environment in which important relative prices experience large changes. The available measures of inflation expectations differ widely across different sources and could be used at most as an additional element in monetary policy decisions, but not as a target. This paper was provided ...

Most economic decisions of economic agents are based upon expectations of inflation. Inflation expectations play an important role for the determination of inflation and the transmission of monetary policy. They are not observable and are inferred from alternative indicators. We show that all these measures generally fail to predict inflation. We also assess their anchoring and show that long-term expectations are better anchored to the inflation target than inflation expectations at shorter horizons ...