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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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Citations

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Cited by:
  1. Andrea CARRIERO & Todd E. CLARK & Massimiliano MARCELLINO, 2012. "Common Drifting Volatility in Large Bayesian VARs," Economics Working Papers ECO2012/08, European University Institute.
  2. Del Negro, Marco & Eusepi, Stefano, 2011. "Fitting observed inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2105-2131.
  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. 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.
  5. J. Scott Davis, 2012. "The effect of commodity price shocks on underlying inflation: the role of central bank credibility," Globalization and Monetary Policy Institute Working Paper 134, Federal Reserve Bank of Dallas.
  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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