Imperfect macroeconomics expectations under Eurozone unconventional monetary policy

Details

Supervisors

Monti, Francesca

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation économétrie, à finalité approfondie

Abstract

Recent scholarly investigations primarily focus on the responses of inflation and unemployment expectation, as well as forecast errors, to conventional monetary policy shocks and various macroeconomic disturbances. A consistent pattern of overreaction or underreaction in forecasts has been identified across studies. This paper aims to provide empirical evidence on overreaction or underreaction in the context of unconventional monetary policy (UMP) shocks within the Eurozone. Unlike conventional monetary policies, which predominantly influence the short term segment of the yield curve, forward guidance and quantitative easing exert their effects on medium- to long-term yield premiums, thereby reflecting expectations regarding future economic conditions. Consequently, we hypothesize that UMP shocks may elicit distinct response patterns. Our empirical findings yield several noteworthy insights. First, professional forecasters exhibit an initial overreaction followed by a subsequent underreaction to expansionary forward guidance policies concerning inflation and unemployment expectations. Second, we observe that inflationary forward guidance policies have an eight-quarter lagged effect on both realized and expected inflation. Finally, incorporating a sufficient amount of macroeconomic information as control variables help to improve the seemingly counterintuitive responses observed in expected unemployment.