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The common and specific components of inflation expectation across European countries

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JournalEmpirical Economics
DateAccepted/In press - 24 Jan 2021
DateE-pub ahead of print (current) - 4 Mar 2021
Early online date4/03/21
Original languageEnglish

Abstract

Inflation expectation (IE) is often considered to be an important determinant of
actual inflation in modern economic theory, we are interested in investigating the
main risk factors that determine its dynamics. We first apply a joint arbitrage-free
term structure model across different European countries to obtain estimate for
country-specific IE. Then we use the two-component and three-component models
to capture the main risk factors. We discover that the extracted common trend
for IE is an important driver for each country of interest. Moreover a spatialtemporal copula model is fitted to account for the non-Gaussian dependency across countries. This paper aims to extract informative estimates for IE and provide good implications for monetary policies.

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