SUERF Policy Brief Do EME central banks have room to shape inflation expectations when global inflation surges?

We thus address two crucial questions: 1) how has the sensitivity of inflation expectations to global inflation recently changed in EMEs, and 2) how can EME central banks reduce the impact of global inflation on inflation expectations? Our recent work (Aguilar et al (2024)) aims to provide the first empirical evidence of the sensitivity of inflation expectations to changes in global inflation afte. [...] We do so for both the average and the dispersion, and we provide the first empirical evidence of the role of central banks in this regard.2 We find strong evidence that EME central banks have room to shape inflation expectations when global inflation surges. [...] To investigate whether the increased sensitivity of inflation expectations to global inflation was specific to this component, we examine the transmission of the idiosyncratic component to expectations. [...] While the red lines in Graph 3 show the impact of the global inflation component on inflation expectations, the green lines show the interaction term between global inflation and EME monetary policy shocks. [...] 3 If the likely sign of the impact of global inflation on expectations is positive (red lines), we would expect that the sign of the interaction term between global inflation and monetary policy shocks is negative (green lines).