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Decomposing the declining volatility of long-term inflation expectations

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  • Clark, Todd E.
  • Davig, Troy

Abstract

The level and volatility of survey-based measures of long-term inflation expectations have come down dramatically over the past several decades. To capture these changes in inflation dynamics, we embed both short- and long-term expectations into a medium-scale VAR model with stochastic volatility. The model estimates attribute most of the marked decline in the volatility of expectations to smaller shocks to long-run inflation expectations. According to our estimates, the volatility of shocks plummeted in the early to mid-1980s, moved to a somewhat higher level that prevailed for much of the 1990s, and then declined to and remained at very low levels.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 7 (July)
Pages: 981-999

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:7:p:981-999

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Surveys Stochastic volatility Bayesian econometrics;

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References

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Cited by:
  1. Marco Del Negro & Stefano Eusepi, 2010. "Fitting observed inflation expectations," Staff Reports 476, Federal Reserve Bank of New York.
  2. Kim, Jerim & Kim, Bara & Moon, Kyoung-Sook & Wee, In-Suk, 2012. "Valuation of power options under Heston's stochastic volatility model," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1796-1813.
  3. Elmar Mertens, 2011. "Measuring the level and uncertainty of trend inflation," Finance and Economics Discussion Series 2011-42, Board of Governors of the Federal Reserve System (U.S.).
  4. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2012. "Common drifting volatility in large Bayesian VARs," Working Paper 1206, Federal Reserve Bank of Cleveland.
  5. Scott Davis, 2012. "The Effect of Commodity Price Shocks on Underlying Inflation: The Role of Central Bank Credibility," Working Papers 272012, Hong Kong Institute for Monetary Research.
  6. Valcarcel, Victor J., 2012. "The dynamic adjustments of stock prices to inflation disturbances," Journal of Economics and Business, Elsevier, vol. 64(2), pages 117-144.

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