Inflation expectations and the ECB's perceived inflation objective: Novel evidence from firm-level data.

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Date: July 2022
Publisher: Elsevier B.V.
Document Type: Report
Length: 476 words

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Abstract :

Keywords Firms' inflation expectations; Information treatments; ECB'S inflation aim; Monetary policy; Survey data Highlights * We study how the awareness of the ECB's inflation target shapes firms' inflation expectations in a low inflation environment. * When explicitly reminded about the ECB's target, firms revise their expectations upward and towards 2%. * The "below, but close to, 2%" formulation left room for interpretation and led to heterogeneous numerical perceptions. * Firms anchored their long-term expectations at values lower than the ECB's intended inflation aim. * Few firms paid attention to the announcement of the new ECB's 2% inflation target but those who did raised their inflation expectations. Abstract Using a unique experiment on a rich survey of Italian firms, we study how the awareness of the formulation of the ECB's inflation aim shapes their inflation expectations. By means of a randomized controlled trial we show that, in years of low inflation, such awareness raises firms' inflation expectations by about 25 basis points at all time horizons, shifting them closer to the ECB's target. We also document that when there is room for interpretation of an official inflation objective, as in the case of the "below, but close to, 2%" formulation, economic agents have heterogeneous perceptions of that, with the majority of firms indicating values not as close to 2% as intended by the ECB. Consequently, this led firms to anchor their expectations to values lower than the official target. Evidence from firms show that this difficulty in interpreting the "below, but close to, 2%" formulation was tackled by the precise 2% definition of the ECB's inflation target as announced in July 2021. However, firms paid little attention to this new formulation in the immediate aftermath of its announcement, which calls for further efforts in terms of communication by the central bank in order to reach a broader public. Author Affiliation: Bank of Italy, DG Economics, Statistics and Research, Italy * Corresponding author. Article History: Received 14 June 2021; Revised 16 March 2022; Accepted 17 March 2022 (footnote)[white star] The views expressed in this article are those of the authors and do not necessarily represent the positions of the Bank of Italy or of the ECB/Eurosystem. We are grateful to the Editor (Yuriy Gorodnichenko) and one anonymous referee for their helpful comments and suggestions. We thank Marco Bernardini, Paolo Del Giovane, Silvia Fabiani, Andrea Neri, Stefano Neri, Maritta Paloviita (discussant), Marianna Riggi, Tiziano Ropele, Alfonso Rosolia and Roberta Zizza for their useful comments at different stages of this work and participants at the 2021 EEA Conference, the Ventotene Macro Workshop, the National Bank of Ukraine, the ESCB Research Cluster on Monetary Economics, and the ECB-NYFED conference on expectations surveys for their feedbacks. The authors did not receive outside funding for this research. All the remaining errors are ours alone. Byline: Marco Bottone, Alex Tagliabracci [alex.tagliabracci@bancaditalia.it] (*), Giordano Zevi

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Gale Document Number: GALE|A708650508