A KISS for central bank communication in times of high inflation (with Mathias Hoffmann, Lora Pavlova, and Guido Schultefrankenfeld), SUERF Policy Brief No. 1211, July 2025
Central banks have used communication about the inflation outlook as an additional policy tool in response to the post-pandemic inflation surge. We present novel survey evidence that the ECB’s guidance about its projected inflation path can substantially lower households’ inflation expectations when kept in a sophisticatedly simple (KISS) way.
A KISS for central bank communication in times of high inflation (with Mathias Hoffmann, Lora Pavlova, and Guido Schultefrankenfeld), Bundesbank Research Brief No. 75, May 2025
Central banks have used communication about the inflation outlook as an additional policy tool in response to the post-pandemic inflation surge. We present novel survey evidence that the ECB’s guidance about its projected inflation path can substantially lower households’ inflation expectations when kept in a sophisticatedly simple (KISS) way.
Forceful or persistent: (How the ECB’s New Inflation Target Affects Households’ Inflation Expectations) (with Mathias Hoffmann, Lora Pavlova, and Guido Schultefrankenfeld), SUERF Policy Brief No. 794, February 2024
The ECB announced a new monetary policy strategy in July 2021. In contrast to the previous strategy of aiming at inflation close to, but below 2 %, it now pursues a symmetric 2% inflation target over the medium term. In addition, the ECB explicitly indicated some tolerance for above-target inflation to avoid low inflation from becoming entrenched. The main goal of this added clause was to lift private-sector inflation expectations in times when policy is constrained by the effective lower bound of interest rates. In this brief, we assess whether the new strategy had the intended effects. Using a representative survey of German individuals conducted just after the introduction of the new strategy, we find that respondents make little difference between the previous strategy of targeting inflation close to but below 2% and the new symmetric 2% inflation target. However, when informed about the ECB’s increased tolerance for inflation overshooting, they expect substantially higher inflation in the following years when current inflation is running below target.
Words speak louder than numbers: Central bank communication in times of high inflation (with Mathias Hoffmann, Guido Schultefrankenfeld and Lora Pavlova), VoxEU Column, August 2022
In 2022, consumer price inflation in the euro area has climbed to record highs. As a result, many households have increased their inflation expectations, thus increasing the risks of more persistent inflation in the future. Using the Bundesbank Online Panel Households as a laboratory, this column provides evidence that individuals who are shown ECB communication on the inflation outlook significantly reduce their inflation expectations. Furthermore, explaining the outlook verbally has a substantially larger effect than merely providing numerical projections.
The effects of the ECB’s new inflation target on private households’ inflation expectations Bundesbank Research Brief (with Mathias Hoffmann, Guido Schultefrankenfeld and Lora Pavlova), Bundesbank Research Brief No. 43, November 2021
Is there a difference between the inflation expectations of private households in Germany formed under the ECB’s previous target definition of “below, but close to, 2%” and those under the new inflation target of “symmetrically 2%”? New survey results from the Bundesbank Online Panel Households (BOP-HH) show that the new inflation target is associated with moderately higher inflation expectations for the next two to three years. The differences become more accentuated when the respondents are also told that the new monetary policy strategy entails the possibility of inflation exceeding the target.
Climate Change and Monetary Policy in the Euro Area (with many co-authors), ECB Occasional Paper No. 2021/271, September 2021
This paper analyses the implications of climate change for the conduct of monetary policy in the euro area. It first investigates macroeconomic and financial risks stemming from climate change and from policies aimed at climate mitigation and adaptation, as well as the regulatory and fiscal effects of reducing carbon emissions. In this context, it assesses the need to adapt macroeconomic models and the Eurosystem/ECB staff economic projections underlying the monetary policy decisions. It further considers the implications of climate change for the conduct of monetary policy, in particular the implications for the transmission of monetary policy, the natural rate of interest and the correct identification of shocks. Model simulations using the ECB’s New Area-Wide Model (NAWM) illustrate how the interactions of climate change, financial and fiscal fragilities could significantly restrict the ability of monetary policy to respond to standard business cycle fluctuations. The paper concludes with an analysis of a set of potential monetary policy measures to address climate risks, insofar as they are in line with the ECB’s mandate.
Clear, Consistent and Engaging: ECB Monetary Policy Communication in a Changing World (with many co-authors), ECB Occasional Paper No. 2021/274, September 2021
This paper examines the importance of central bank communication in ensuring the effectiveness of monetary policy and in underpinning the credibility, accountability, and legitimacy of independent central banks. It documents how communication has become a monetary policy tool in itself; one example of this being forward guidance, given its impact on inflation expectations, economic behaviour and inflation. The paper explains why and how consistent, clear and effective communication to expert and non-expert audiences is essential in an environment of an ever-increasing need by central banks to reach these audiences. Central banks must also meet the demand for more understandable information about policies and tools, while at the same time overcoming the challenge posed by the wider public’s rational inattention. Since the European Central Bank was established, the communications landscape has changed dramatically and continues to evolve. This paper outlines how better communication, including greater engagement with the wider public, could help boost people’s understanding of and trust in the Euro system.
Market liquidity of European sovereign bonds during the Covid-19 crisis, (with Loriana Pelizzon and Michael T. Schneider), SAFE Finance Blog, Jun 2021
The spread of Covid-19 has caused tremendous stress to public health around the globe. As the scale of the pandemic became increasingly clear to investors in March 2020, financial markets were strongly affected – both in terms of valuations and their functioning. Economists use the concept of market liquidity to capture the ease of trading in financial markets. In this column, we study how market liquidity in European sovereign bonds evolved at the start of the pandemic, and explore the main possible drivers of this evolution: “dash for cash” or “dash for collateral”.
‘Dash for cash’ versus ‘dash for collateral’: Market liquidity of European sovereign bonds during the Covid-19 crisis, VoxEU Column, (with Loriana Pelizzon and Michael T. Schneider), VoxEU Column, March 2021
In March 2020, a ‘dash for cash’ driven by the Covid-19 crisis affected the liquidity of the US Treasury bonds market as well as numerous other financial markets around the globe. This column investigates how euro area sovereign bond markets fared during the same period. While deteriorations in sovereign debt market liquidity are evident, these appear to be driven by a ‘dash for collateral’ in euro-denominated safe assets. This suggests some differences from the US experience, as well as variations across European countries.
How institutional investment funds’ reach for yield intensifies asset price volatility, VoxEU Column, (with Alexandru Barbu and Christoph Fricke), VoxEU Column, March 2021
Institutional funds manage the majority of the assets under management of all German investment funds. This column documents that institutional funds act in a strongly procyclical manner, by actively investing in higher-yielding, longer-duration and lower-rated assets as yield spreads compress. The authors show that this intensifies asset price volatility and highlight reasons behind this procyclical investment behaviour.
How institutional investment funds’ reach for yield intensifies asset price volatility, (with Alexandru Barbu and Christoph Fricke), Bundesbank Research Brief No. 38, January 2021
Institutional funds manage the majority of the assets under management of all German investment funds. This research brief documents that institutional funds act in a strongly procyclical manner: they actively invest in higher-yielding, longer-duration and lower-rated assets as yield spreads compress. We show that this intensifies asset price volatility and highlight reasons behind this procyclical investment behaviour.
The Term Structures of Global Yields, Keynote address at Bank of Korea – BIS Joint Conference on Asia-Pacific fixed income markets: evolving structure, participation and pricing, April 2019
Sovereign bond yields in more than 20 developed and emerging market economies are decomposed into expected short rates and term premia using the Adrian, Crump and Moench (2013) approach. I document that (i) term premia account for large fractions of global bond yield variation; (ii) the co-movement of sovereign bond yields is, to a large extent, driven by the term premium components of sovereign yields, especially in recent years; (iii) connectedness and tail dependence between international bond markets are primarily driven by the term premium components of global yields; and (iv) global bond yields strongly respond to US target rate shocks, albeit with considerable delay. This response is primarily driven by a reassessment of global policy rate expectations.
The Pre-FOMC Announcement Drift: More Recent Evidence (with David Lucca), Federal Reserve Bank of New York Liberty Street Economics Blog, November 2018
We had previously documented large excess returns on equities ahead of scheduled announcements of the Federal Open Market Committee (FOMC)—the Federal Reserve’s monetary policy-making body—between 1994 and 2011. This post updates our original analysis with more recent data. We find evidence of continued large excess returns during FOMC meetings, but only for those featuring a press conference by the Chair of the FOMC.
The impact of Eurosystem bond purchases on the repo market (with Stephan Jank), Bundesbank Research Brief No. 21, September 2018
German sovereign bonds have become scarce on the European repo market over recent years. A new analysis investigates the impact of the Eurosystem’s monetary policy asset purchase programme on the repo market, and shows that central bank securities lending can help to counteract scarcity.
Learning from disagreement: Evidence from forecasters, (with Philippe Andrade, Richard Crump, and Stefano Eusepi), VoxEU Column, December 2014
Expectations are critical for macroeconomics and financial markets. But the expectation-formation process is not well understood. This column discusses some empirical characteristics of forecast disagreement from professional forecasters in the US, and discusses the ‘information frictions’ that underlie the heterogeneity of expectations.
Data Insight: Which Growth Rate? It’s a Weighty Subject (with Richard Crump, Stefano Eusepi, and David Lucca), Federal Reserve Bank of New York Liberty Street Economics Blog, December 2014
The growth rate in real gross domestic product (GDP) is a conventional indicator of the economy’s health. But the two ways of measuring annual GDP growth can give very different answers. In 2013, GDP grew 2.2 percent on a year-over-year basis, but at a faster 3.1 percent rate on a Q4-over-Q4 basis. So, which measure is more meaningful? We show in this post that the Q4/Q4 metric is better since it only considers quarterly growth rates during the current year, while the Year/Year measure depends on quarterly growth rates in both the current and previous year and puts considerable weight on growth around the turn of the year.
Interest Rate Derivatives and Monetary Policy Expectations (with Richard Crump, William O'Boyle, Matthew Raskin, Carlo Rosa, and Lisa Stowe), Federal Reserve Bank of New York Liberty Street Economics Blog, December 2014
Market expectations of the path of future policy rates can have important implications for financial markets and the economy. Because interest rate derivatives enable market participants to hedge against or speculate on potential changes in various short-term U.S. interest rates, they are a rich and timely source of information on market expectations. In this post, we describe how information about market expectations can be derived from interest rate futures and forwards, focusing on three main instruments: federal funds futures, overnight index swaps (OIS), and Eurodollar futures. We also discuss how options on interest rate futures can be used to gain insight into the full distribution of rate expectations—information that cannot be gleaned from futures or forwards alone. In a forthcoming companion post, we explore an alternative source of policy rate expectations based on the two surveys conducted by the Trading Desk at the Federal Reserve Bank of New York.
Survey Measures of Expectations for the Policy Rate (with Richard Crump, William O’Boyle, Matthew Raskin, Carlo Rosa, and Lisa Stowe), Federal Reserve Bank of New York Liberty Street Economics Blog, December 2014
Market prices provide timely information on policy expectations. But as we emphasized in our previous post, they can deviate from investors’ expectations of the most likely path because they embed risk premiums and represent probability-weighted averages over different possible paths. In contrast, surveys explicitly ask respondents for their views on the likely path of economic variables. In this post, we highlight two surveys conducted by the Federal Reserve Bank of New York that provide information about expectations that can complement market-based measures.
Connecting the Dots: Disagreement in the Federal Open Market Committee (with Richard Crump, Troy Davig, and Stefano Eusepi), Federal Reserve Bank of New York Liberty Street Economics Blog, September 2014
People disagree, and so do the members of the Federal Open Market Committee (FOMC). How much do they disagree? Why do they disagree? We look at the FOMC’s projections of the federal funds rate (FFR) and other variables and compare them with those in the New York Fed’s Survey of Primary Dealers (SPD). We show that the members of the FOMC tend to disagree more than the primary dealers and offer some potential explanations.
Treasury Term Premia: 1961-Present (with Tobias Adrian, Richard Crump, and Benjamin Mills), Federal Reserve Bank of New York Liberty Street Economics Blog, May 2014
Treasury yields can be decomposed into two components: expectations of the future path of short-term Treasury yields and the Treasury term premium. The term premium is the compensation that investors require for bearing the risk that short-term Treasury yields do not evolve as they expected. Studying the term premium over a long time period allows us to investigate what has historically driven changes in Treasury yields. In this blog post, we estimate and analyze the Treasury term premium from 1961 to the present, and make these estimates available for download here↗.
Preparing for Takeoff? Professional Forecasters and the June 2013 FOMC Meeting (with Richard Crump and Stefano Eusepi), Federal Reserve Bank of New York Liberty Street Economics Blog, September 2013
Following the June 18-19 Federal Open Market Committee (FOMC) meeting different measures of short-term interest rates increased notably. In the chart below, we plot two such measures: the two-year Treasury yield and the one-year overnight indexed swap (OIS) forward rate, oneyear in the future. The vertical line indicates the final day of the June FOMC meeting. To what extent did this rise in rates following the June FOMC meeting reflect a shift in the expected future path of the federal funds rate (FFR)? Market participants and policy makers often directly read the expected path from financial market data such as the OIS contracts. In this post, we take an alternative approach by looking at surveys of professional forecasters to assess how expectations changed.
Do Treasury Term Premia Rise around Monetary Tightenings? (with Tobias Adrian and Richard Crump), Federal Reserve Bank of New York Liberty Street Economics Blog, April 2013
Some commentators have expressed concern that Treasury yields might rise sharply once the Federal Open Market Committee (FOMC) begins to raise the federal funds rate (FFR), worrying, in particular, about a sudden increase in Treasury term premia. In this post, we analyze the dynamics of Treasury term premia over the last fifty years and discuss their evolution around recent tightening cycles, paying special attention to the 1994 episode when bond prices dropped sharply around the world. We find that term premia don’t typically rise when monetary policy tightens. We also conclude, based on the behavior of term premia and survey evidence, that the sharp rise in Treasury yields in 1994 was in large part due to an upward shift in the expected path of future short-term interest rates.
Making a Statement: How Did Professional Forecasters React to the August 2011 FOMC Statement? (with Richard Crump and Stefano Eusepi), Federal Reserve Bank of New York Liberty Street Economics Blog, January 2013
The Federal Open Market Committee (FOMC) statement released on August 9, 2011, was the first to incorporate language on “forward guidance” with an explicit date tied to the Committee’s expected path of monetary policy. In this post, we exploit the timing of surveys taken before and after this statement’s release to investigate how professional forecasters changed their expectations of growth, inflation, and monetary policy. We find that the average forecast of the federal funds rate shifts considerably and closely aligns with the new language in the statement, while the average forecasts for growth and inflation change less. While there’s near unanimity among forecasters about the future path of the federal funds rate after the August 2011 FOMC statement, forecasters maintained differing views on the growth and inflation outlooks.
The Puzzling Pre-FOMC Announcement “Drift” (with David Lucca), Federal Reserve Bank of New York Liberty Street Economics Blog, July 2012
For many years, economists have struggled to explain the “equity premium puzzle”—the fact that the average return on stocks is larger than what would be expected to compensate for their riskiness. In this post, which draws on our recent New York Fed staff report↗, we deepen the puzzle further. We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement “drift.”
How Well Do Financial Markets Separate News from Noise? Evidence from an Internet Blooper (with Carlos Carvalho and Nick Klagge), Federal Reserve Bank of New York Liberty Street Economics Blog, October 2011
How efficiently do financial markets process news of unexpected events? This question becomes particularly salient now, as multiple events across the globe drive market movements. Do these gyrations reflect responses to fundamental news or to “noise”? In general, it is very difficult to discern how well markets process information, because there is no objective way for observers to separate fundamental news from noise components when markets react to a news report. In this post, however, we examine an unusual episode involving a false news report that provides a unique look into this question. We find that even when noise can be clearly identified, markets may take as long as a week to fully process the “signal,” or relevant information, component of news.
A Look at the Accuracy of Policy Expectations (with Richard Crump and Stefano Eusepi), Federal Reserve Bank of New York Liberty Street Economics Blog, August 2011
Since the 1980s, the primary policy tool of the Federal Reserve has been the federal funds rate. Because expectations of the future path of the funds rate play a central role in the term structure of interest rates and thus the monetary transmission mechanism, it is important to know how accurate these expectations are in predicting the funds rate. In this post, we investigate this issue using a well-known survey of private sector forecasters. We find that forecasts tend to over-predict the funds rate in easing cycles and under-predict it in tightening cycles. In addition, while forecasts during tightening cycles have become more accurate over time, forecast accuracy during easing cycles has not improved.
“Why is the Market Share of Adjustable-Rate Mortgages so Low?” (with Diego Aragon and James Vickery), Current Issues in Economics and Finance, December 2010.
Over the past several years, U.S. homebuyers have increasingly favored fixed-rate mortgages over adjustable-rate mortgages (ARMs). Indeed, ARMs have dropped to less than 10 percent of all residential mortgage originations, a near-record low. One might speculate that the decline in the ARM share has been driven by “one-off” factors relating to the financial crisis. However, a statistical analysis suggests that recent trends can largely be explained by the same factors that have historically shaped mortgage choice—most notably, the term structure of interest rates and its effects on the relative price of different types of mortgages. Supply-side factors, in particular a rise in the share of mortgages eligible to be securitized by the housing government-sponsored enterprises, also play a role in the low current ARM share.
