Reproduction permitted only if source is stated. Non-technical summary Research QuestionInflation expectations are important for gauging the effectiveness and credibility of monetary policy. Concentrating on the period of the sovereign debt crisis we look at the drivers and the anchoring of inflation expectations derived from inflation option data for the euro area. ContributionWe use a new data set on options on the euro area harmonized index of consumer prices to derive probability distributions of inflation expectations including uncertainty and asymmetry of market participants beliefs about the inflation outlook. For analyzing the changing effects of monetary policy announcements and macro news over the sample period from 2009 to 2013 we use a time varying event study framework. A third contribution is to compare option implied and statistical density functions to gain insight into deflation risk. ResultsInflation expectations show a decreasing mean but growing uncertainty especially since the intensification of the sovereign debt crisis in mid-2011. Around the same time the influence of monetary policy announcements on inflation expectations diminished. Tail events such as deflation although still contained became more probable. The impact of macroeconomic news to explain inflation probabilities overall decreased and shifted towards countries more affected by the crisis. Concerning the anchoring of inflation expectations the paper provides a twofold result: The mean and low sensitivity to actual news speak for anchored inflation expectations whereas the growing uncertainty reveals market participants concerns about possible extreme inflation or deflation outcomes in the future. ErgebnissëUber den Krisenzeitraum sanken die Inflationserwartungen der Marktteilnehmer deutlich. Gleichzeitig waren sie sich stärker uneinsüber zukünftige Inflationsszenarien, die Unsicherheit der Inflationserwartungen nahm zu. Der Einfluss von geldpolitischen Ankündigungen verringerte sich, der Effekt von makroökonomischenÜberraschungen ebenso. Letztere verlagerten sich außerdem auf das stärker von der Krise betroffene Italien. Die Wahrscheinlichkeit einer zukünftigen Deflation wurde höher eingeschätzt, sie ist zudem mit Indikatoren für Heterogenität im Euro-Raum wie Renditeeunterschieden von Staatsanleihen positiv korreliert. Der Mittelwert und die geringe Reaktion langfristiger Inflationserwartungen sprechen für weiterhin fest verankerte Inflationserwartungen. Gleichzeitig wird aber auch eine zunehmende Unsicherheitüber den zukünftigen Verlauf der Inflationsentwicklung festgestellt. Bundesbank Discussion Paper No 24/2014Inflation, deflation, and uncertainty: What drives euro area option-implied inflation expectations and are they still anchored in the sovereign debt crisis? * Michael Scharnagl Deutsche Bundesbank Jelena Stapf Deutsche BundesbankAbstract We tackle two questions in this paper: In the sovereign debt crisis, what moves the euro area inflation outlook and has the firm anchoring of medium to long-term inflation expect...

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Abstract:We analyze contributions of dierent markets to price discovery on traded ination expectations and how it changed during the nancial crisis. The quicker information is processed on one market and the less one market is disrupted by the nancial crisis the more valuable is its information for central banks and market participants. We use a new high frequency data set on ination-indexed and nominal government bonds as well as ination swaps to calculate information shares of break-even ination rates in the euro area and the US. For maturities up to 5 years new information comes from both the swap and the bond markets. For longer maturities the swap market provides less and less information in the euro area. In the US where the market volume of ination-linked bonds is large the bond market dominates the price discovery process for all maturities. The severe nancial crisis that spread out in Autumn 2008 drove a wedge between bond and swap break-even ination rates in both currencies. Price discovery ceased to take place on the swap market. Disruptions coming from the short-end of the market even separated price formation on both segments for maturities of up to 6 years in the US. Against the backdrop of the most severe nancial crisis in decades contributions to price formation concentrated a lot more on the presumably safest nancial instrument: government bonds.Keywords: ination-linked bonds, ination swaps, price discovery, nancial crisis JEL-Classication: E43, F37, G15 Non-technical summaryWe analyze price discovery on traded ination expectations in the euro area and the US and how it changed during the nancial crisis. Ination expectations are traded on the ination-indexed bond market and the ination swap market. The quicker information is processed on one market and the less one market is disrupted by the nancial crisis the more valuable is its information for central banks and market participants. We draw on the one hand on the eects of the dierent structure that is the size and liquidity of the two markets in both currency areas. On the other hand we look at the impact of the nancial crisis that amplied severely in Autumn 2008.We use a high frequency data set on ination-indexed as well as nominal government bonds and ination swaps to calculate break-even ination rates (BEIR) that is ination expectations plus risk and liquidity premia. Since swap and bond BEIR draw on the same ination-linked cash ow arbitrage ties their prices together. We therefore apply standard price discovery measures which recover each markets contribution for driving an underlying ecient price of the BEIR.The euro area index-linked bond market is rather partitioned, with dierent credit ratings of issuers and two relevant ination indices, thus liquidity is dispersed. Against this backdrop, the euro ination swap market developed very well recently. On the other side of the Atlantic, the US maintains a well established issuance program of Treasury Ination Protected Securities (TIPS) and exhibit only a small ination swap market. Therefore,...

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