The Impact of Forward Guidance on Inflation Expectations: Evidence from the ECB

• Authors: Jean-Alexandre Vaglio, Dorian Henricot, Juraj Falath and Marc de la Barrera.
• BSE Working Paper: 1010 | December 17
• Keywords: unconventional monetary policies , forward guidance , inflation expectations , empirical macroeconomics
• JEL codes: E31, E52, E65
• unconventional monetary policies
• forward guidance
• inflation expectations
• empirical macroeconomics

This paper empirically investigates the impact of forward guidance announcements on inflation expectations in the Eurozone. We 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 across maturities. Analyzing the transmission channels of forward guidance, we find evidence that both a reanchoring channel and a portfolio effect might have been at play.