Unconventional monetary policy and inflation expectations in the Euro area

Abstract

With the nominal short-term interest rates approaching the zero-lower bound, the ECB adopted a range of unconventional monetary policies (UMP) to push inflation back to its target, but inflation has remained far below two percentage points. While conventional monetary policy tools are ineffective, inflation expectations become a key channel for the transmission of monetary policy. Nevertheless, there is still no clear consensus about the effectiveness of UMP on inflation expectations. By constructing a novel measure for UMP, our study examines the effects of the ECB's UMP on inflation expectations in the Euro area during 2009–2018. We find that an unanticipated UMP shock raises inflation expectations in the short-term. However, as higher inflation expectations do not boost GDP nor realized inflation, they decrease after a few months, which suggests that the expectation channel is not fully functioning even if the ECB manages to stabilize inflation expectations temporarily.