The flight to quality is a predictable consequence of current financial conditions: the fragility of some countries and banks, combined with the heightened uncertainty regarding the future. Investors react by trying to move funds from more indebted countries to “safe havens”.
Another useful way to address this issue is to derive expectations by smoothing the inflation series. This presupposes that expectations are adaptive 25 which is often the case in economies and markets with asymmetric information. Furthermore, given monetary policy credibility, the underlying inflation expectations are generally stable but for the deviations caused by short term volatility due to transitory factors 26 .