Inflation expectations and monetary policy surprises

Abstract

We use monthly data across fifteen euro-area economies for the period 1985:1-2015:3 to obtain monetary policy changes that can be regarded as surprises for different types of consumers. A novel feature of our empirical approach is the estimation of monetary policy surprises based on changes in monetary policy that were unanticipated according to the consumers stated beliefs about the economy. We go on to investigate how these monetary policy surprises affect consumers’ inflation expectations. We find that such monetary policy surprises can have the opposite impact on inflation expectations to those obtained under the assumption that consumers are well informed about a set of macroeconomic variables describing the state of the economy. More specifically, when we relax the assumption of well informed consumers by focusing instead on their stated beliefs about the economy, unanticipated increases in the interest rate raise inflation expectations. This is consistent with imperfect information theoretical settings where unanticipated increases in interest rates are interpreted as positive news about the state of the economy by consumers that know policymakers have relatively more information. This impact changes sign since the Crisis.