WORKING PAPER NO. 136 RETAIL BANK INTEREST RATE PASS-THROUGH: NEW EVIDENCE AT THE EURO AREA LEVEL

A further issue is whether fiscal policy problems have lead to higher long-term inflation expectations. The bold line in Figure 3, depicting long-term inflationary expectations, as extracted from long-term index linked bond prices, indicates that this was not the case. After an initial increase until May, break-even inflation decreased to its initial level in October, and remained stable thereafter. This development is again not clearly linked to fiscal policy events, although the initial implementation problems may have contributed to the initial rise, and the renewed strengthening of the Pact in November to the stability of inflation expectations. But the comparison with the implied break-even inflation rate in...