The impact of forward guidance on inflation expectations: evidence from the ECB

Barrera, Marc de la; Falath, Juraj; Henricot, Dorian; Vaglio, Jean-Alexandre

The impact of forward guidance on inflation expectations: evidence from the ECB

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Barrera, M, Falath, J, Henricot, D, Vaglio, J. The impact of forward guidance on inflation expectations: evidence from the ECB. 2017. handle: http://hdl.handle.net/10230/33543

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Abstract

This paper empirically investigates the impact of forward guidance announcements on inflation expectations in the Eurozone. The ECB first resorted to forward guidance on July 4, 2013 thereby expanding its array of unconventional policy instruments in the vicinity of the zero-lower bound. We use an ARCH model and identify forward guidance shocks as changes in the 2-year nominal ECB yield on specific announcement days to measure changes in daily inflation swaps of different maturities. In the process, we also separately identify the effect of quantitative easing and interest rate change announcement shocks. We find that forward guidance was successful in reviving inflation expectations in the medium to long term. Analyzing the transmission channels of forward guidance, we find evidence that both a reanchoring channel and a portfolio effect might have been at play.