13: The Great Recession and the Two Dimensions of European Central Bank Credibility

Author(s):

Timo Henckel, Centre for Applied Macroeconomic Analysis, Australian National University
Gordon D. Menzies, Economics Discipline Group, University of Technology, Sydney
Daniel J. Zizzo, School of Economics and CBESS, University of East Anglia

Date of publication: August 2013

Working paper number: 13

Abstract:

A puzzle from the Great Recession is an apparent mismatch between a fall in the persistence of European inflation rates, and the increased variability of expert forecasts of inflation. We explain this puzzle and show how country specific beliefs about inflation are still quite close to the European Central Bank target of 2% (what we call official target credibility) but the degree of anchoring to this target has gone down, implying an erosion of what we call anchoring credibility. A decline in anchoring credibility can explain increased forecast variance independently of any changes in inflation persistence, contrary to standard time series models.

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Acknowledgement of Country

UTS acknowledges the Gadigal people of the Eora Nation, the Boorooberongal people of the Dharug Nation, the Bidiagal people and the Gamaygal people, upon whose ancestral lands our university stands. We would also like to pay respect to the Elders both past and present, acknowledging them as the traditional custodians of knowledge for these lands.