Abstract:
This study examines the potential drivers and their spatial components of inflation expectations of consumers in 22 European Union countries by using the spatial Durbin model. The potential determinants are drawn from the macrosphere (oil prices, food prices, house prices, industrial production), financial sphere (money market interest rates, nominal effective exchange rate, key policy rate), and economic favourable cognition variables (consumer confidence indicator, short-term inflation volatility, medium-term memory reversal of inflation expectations). The implemented binary spatial weight matrices are based on the geographical and economic distances. The economic distance weights define the European Union global trade partners as the most proximal neighbours. Our results confirm the existence of an inherent spatial component in short-term consumers' inflation expectations even when excluding effect of inflation rate anchoring. This finding may provide a possible explanation for disruptions found in monetary policy transmission mechanism in small and open economies. From other perspective, the more interlinked consumers' expectations may open the path to better business cycle synchronisation and strengthen the process of EA convergence, improving the conditions for efficient and effective monetary policy conduct.
