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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

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Keywords: Surveys Stochastic volatility Bayesian econometrics;

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References

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Citations

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Cited by:
  1. 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.
  2. Todd E. Clark & Francesco Ravazzolo, 2012. "The macroeconomic forecasting performance of autoregressive models with alternative specifications of time-varying volatility," Working Paper 2012/09, Norges Bank.
  3. John W. Keating & Victor J. Valcarcel, 2012. "The Time Varying Effects of Permanent and Transitory Shocks to Real Output," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201203, University of Kansas, Department of Economics.
  4. Virginia Queijo von Heideken & Ferre De Graeve, 2012. "Fiscal policy in contemporary DSGE models," 2012 Meeting Papers 74, Society for Economic Dynamics.
  5. Davis, Scott & Mack, Adrienne, 2013. "Cross-country variation in the anchoring of inflation expectations," Staff Papers, Federal Reserve Bank of Dallas, issue Oct.
  6. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2012. "Common drifting volatility in large Bayesian VARs," Working Paper 1206, Federal Reserve Bank of Cleveland.
  7. James M. Nason & Gregor W. Smith, 2013. "Reverse Kalman filtering U.S. inflation with sticky professional forecasts," Working Papers 13-34, Federal Reserve Bank of Philadelphia.
  8. Todd E. Clark & Taeyoung Doh, 2011. "A Bayesian evaluation of alternative models of trend inflation," Working Paper 1134, Federal Reserve Bank of Cleveland.
  9. Del Negro, Marco & Eusepi, Stefano, 2011. "Fitting observed inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2105-2131.
  10. 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.
  11. 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.).
  12. James M. Nason & Gregor W. Smith, 2014. "Measuring the Slowly Evolving Trend in US Inflation with Professional Forecasts," CAMA Working Papers 2014-07, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  13. 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.
  14. J. Scott Davis, 2012. "Central bank credibility and the persistence of inflation and inflation expectations," Globalization and Monetary Policy Institute Working Paper 117, Federal Reserve Bank of Dallas.

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