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Assessing the risk to inflation from inflation expectations

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Author Info

  • Macallan, Clare

    ()
    (Bank of England)

  • Taylor, Tim

    ()
    (Bank of England)

  • O'Grady, Tom

    ()
    (Bank of England)

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    Abstract

    Inflation expectations play an important role in the transmission mechanism of monetary policy. There is a risk that the periods of above-target CPI inflation in the past three years might cause inflation expectations to drift upwards. That might make inflation itself more persistent, via changes in price and wage-setting behaviour. And so, other things being equal, returning inflation to target would require tighter monetary policy. This article provides a framework that can be used to monitor the risk to inflation from inflation expectations. While recent developments provide few signs that the risk is materialising, the imperfect nature of data mean that the risk can be assessed only imperfectly.

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    File URL: http://www.bankofengland.co.uk/publications/quarterlybulletin/qb110201.pdf
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    Bibliographic Info

    Article provided by Bank of England in its journal Bank of England Quarterly Bulletin.

    Volume (Year): 51 (2011)
    Issue (Month): 2 ()
    Pages: 100-110

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    Handle: RePEc:boe:qbullt:0047

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    1. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2006. "The danger of inflating expectations of macroeconomic stability: heuristic switching in an overlapping generations monetary model," Bank of England working papers 303, Bank of England.
    2. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
    3. Refet S Gürkaynak & Andrew Levin & Eric Swanson, 2010. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from the U.S., UK, and Sweden," Journal of the European Economic Association, MIT Press, vol. 8(6), pages 1208-1242, December.
    4. Michael F. Bryan & Brent Meyer, 2010. "Are some prices in the CPI more forward looking than others? We think so," Economic Commentary, Federal Reserve Bank of Cleveland, issue May.
    5. Boero,Gianna & Smith,Jeremy & Wallis,Kenneth F, 2006. "Uncertainty and disagreement in economic prediction : the Bank of England Survey of External Forecasters," The Warwick Economics Research Paper Series (TWERPS) 811, University of Warwick, Department of Economics.
    6. Gürkaynak, Refet S. & Levin, Andrew & Swanson, Eric T, 2006. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK and Sweden," CEPR Discussion Papers 5808, C.E.P.R. Discussion Papers.
    7. Felix Ritchie, 2008. "Secure access to confidential microdata: four years of the Virtual Microdata Laboratory," Economic and Labour Market Review, Palgrave Macmillan, vol. 2(5), pages 29-34, May.
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    Cited by:
    1. Corder, Matthew & Eckloff, Daniel, 2011. "International evidence on inflation expectations during Sustained Off-Target Inflation episodes," Bank of England Quarterly Bulletin, Bank of England, vol. 51(2), pages 111-115.

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