The credibility of the ECB’s inflation target in times of corona: new evidence from an online survey

Abstract

Evidence on the credibility of a central bank’s inflation target typically refers to the anchoring of survey-based measures of inflation expectations. However, both the survey question and the anchoring criteria are only loosely connected to the actual inflation target used in monetary policy practice. By using the exact wording of the ECB’s definition of price-stability, we started a representative online survey of German citizens in January 2019 that is designed to measure the time-varying credibility of the inflation target. Our results indicate that credibility has significantly decreased in our sample period, particularly in the course of the coronavirus pandemic. Interestingly, even though inflation rates in Germany have been clearly below 2% for several years, credibility has declined mainly because Germans increasingly expect that inflation will be much higher than 2% over the medium term.