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Inflation Targeting And The Anchoring Of Inflation Expectations In The Western Hemisphere

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Author Info
Refet S. Gürkaynak
Andrew T. Levin
Andrew N. Marder
Eric T. Swanson

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Abstract

We investigate the extent to which long-run inflation expectations are well anchored in Canada, Chile, and the United States, using a high-frequency event-study analysis. Specifically, we use daily data on far-ahead forward inflation compensation as an indicator of financial market perceptions of inflation risk and the expected level of inflation at long horizons. For the U.S., we find that far-ahead forward inflation compensation reacts significantly to macroeconomic data releases, implying that long-run inflation expectations are not completely anchored. In contrast, the Canadian inflation compensation data does not exhibit significant sensitivity to either Canadian or U.S. macroeconomic news, confirming that inflation targeting in Canada has succeeded in anchoring long-run inflation expectations. Finally, while the requisite data for Chile is available only for a limited sample period (2002-05), our results are consistent with the hypothesis that inflation targeting in Chile has also succeeded in anchoring long-run inflation expectations.

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Publisher Info
Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 9 (2006)
Issue (Month): 3 (December)
Pages: 19-52
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Handle: RePEc:chb:bcchec:v:9:y:2006:i:3:p:19-52

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
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  2. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2002. "Market-based measures of monetary policy expectations," Finance and Economics Discussion Series 2002-40, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. Svensson, Lars E O, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992-4," CEPR Discussion Papers 1051, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Orphanides, Athanasios & Williams, John C, 2005. "Inflation Scares and Forecast-Based Monetary Policy," CEPR Discussion Papers 4844, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Orphanides, Athanasios & Wieland, Volker, 2000. "Inflation zone targeting," European Economic Review, Elsevier, vol. 44(7), pages 1351-1387, June. [Downloadable!] (restricted)
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  6. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 2001. "Peso problem explanations for term structure anomalies," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 241-270, October. [Downloadable!] (restricted)
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  7. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. John H. Cochrane & Monika Piazzesi, 2002. "Bond Risk Premia," NBER Working Papers 9178, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers 02-16, Duke University, Department of Economics. [Downloadable!]
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  12. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May. [Downloadable!] (restricted)
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  15. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June. [Downloadable!] (restricted)
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  16. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 715-741, October. [Downloadable!] (restricted)
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  21. Andrew T. Levin & Jeremy M. Piger, 2004. "Is inflation persistence intrinsic in industrial economies?," Working Paper Series 334, European Central Bank. [Downloadable!]
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  26. Brunner, Allan D, 2000. "On the Derivation of Monetary Policy Shocks: Should We Throw the VAR Out with the Bath Water?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(2), pages 254-79, May.
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mauricio Larraín, 2005. "Monetary Policy and Long-Term Interest Rates in Chile," Working Papers Central Bank of Chile 335, Central Bank of Chile. [Downloadable!]
  2. Beechey, Meredith J & Johannsen, Benjamin K & Levin, Andrew, 2007. "Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area than in the United States?," CEPR Discussion Papers 6536, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Janet L. Yellen, 2006. "Enhancing Fed credibility," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Mar 17. [Downloadable!]
    Other versions:
  4. Melecky, Martin & Rodrıguez Palenzuela, Diego & Soderstrom, Ulf, 2008. "Inflation Target Transparency and the Macroeconomy," MPRA Paper 10545, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  5. Mikael Apel & Anders Vredin, 2007. "Monetary-Policy Communication: The Experience of the Swedish Riksbank," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(11-12), pages 499-520, December. [Downloadable!]
  6. Aaron Drew & Özer Karagedikli, 2008. "Some benefits of monetary policy transparency in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/01, Reserve Bank of New Zealand. [Downloadable!]
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  7. Meredith Beechey, 2006. "A closer look at the sensitivity puzzle: the sensitivity of expected future short rates and term premia to macroeconomic news," Finance and Economics Discussion Series 2007-06, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  8. Klaus Schmidt-Hebbel, 2006. "La Gran Transición de Regímenes Cambiarios y Monetarios en América Latina," Economic Policy Papers Central Bank of Chile 17, Central Bank of Chile. [Downloadable!]
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