Olesya Grishchenko - Federal Reserve Board, en collaboration avec Sarah Mouabbi, Jean-Paul Renne
Abstract : We propose a dynamic factor model with time-varying uncertainty for the joint estimation of inflation expectations in the United States and the euro area. We exploit information in several U.S. and euro area surveys of professional forecasters to fit the first two moments of future inflation rates. Our model provides closed-form solutions for conditional expectations and variances of inflation at different horizons and is able to closely match their survey-based counterparts. Survey-consistent probabilities of future inflation falling within a given range of inflation outcomes are used to evaluate whether inflation expectations are anchored. We find that since 2010 inflation expectations decreased noticeably in both economies, and that over our sample period the U.S. displayed larger inflation uncertainty relative to the euro area. The correlation between future inflation rates in the two economies increased. This correlation and probability of deflation occurring jointly in both economies are related to economic policy uncertainty indices.