New IMFS Working Paper by Peter Tillmann and Moritz Grebe on "Inflation Expectations and a Conservative Central Banker: Evidence from a Natural Experiment"
This paper studies the response of inflation expectations to an exogenous shift in central bank preferences. We use the unexpected announcement of the resignation of Jens Weidmann, the president of the Deutsche Bundesbank, in 2021 as a natural experiment constituting a rare case of an exogenous shift in the composition of the ECB’s Governing Council. As a member of the Governing Council, he was a known policy hawk and a vocal critic of the ECB’s asset purchases. Our evidence from survey data suggests that the news about the resignation causes a strong increase in individual inflation uncertainty of German households and a significant fall in the level of trust in the ECB. The effect on the mean inflation expectations remains inconclusive. Thus, the shift in policy preferences exerts a strong effect on second moments, while the first moment effect remains weak.