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Has the behavior of inflation and long-term inflation expectations changed?

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  • Todd E. Clark
  • Taisuke Nakata

Abstract

From 1975 to 1980, inflation in core (nonfood and nonenergy) consumer prices rose sharply as crude oil prices more than tripled. Yet, as crude oil prices quadrupled from late 2001 to 2007, core consumer price inflation remained essentially flat. Some observers have attributed the stability of consumer price inflation in the more recent episode to the influence of long-term inflation expectations. While inflation expectations rose significantly in the second half of the 1970s, they remained largely unchanged from 2001 through 2007. The increased stability of inflation and long-term expectations raises the possibility that the behavior of both variables has fundamentally changed. ; Recent discussion has focused on two possible forms of change: the influence of long-run expectations on inflation and the anchoring of inflation and expectations. A third possible source of change is smaller shocks to inflation, expectations, and other macroeconomic variables. Any of these changes in the behavior of inflation and long-term inflation expectations could have important implications for monetary policy. ; Clark and Nakata find some evidence that the dynamics of inflation and long-term inflation expectations have changed modestly. In particular, compared to 20 or more years ago, inflation and expectations appear to be slightly better anchored: Unexpected increases in inflation die out slightly faster and produce less of an increase in long-term expectations. However, the reduced volatility of inflation and expectations is largely due to smaller shocks.

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Bibliographic Info

Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2008)
Issue (Month): Q I ()
Pages: 17-50

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Handle: RePEc:fip:fedker:y:2008:i:qi:p:17-50:n:v.93no.1

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Keywords: Inflation (Finance) ; Consumer price indexes;

References

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  15. repec:fip:fedgsq:y:2007:i:jul10 is not listed on IDEAS
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Cited by:
  1. Christopher Reicher & Johannes Utlaut, 2011. "The effect of inflation on real commodity prices," Kiel Working Papers 1704, Kiel Institute for the World Economy.
  2. Demertzis, Maria & Marcellino, Massimiliano & Viegi, Nicola, 2008. "A Measure for Credibility: Tracking US Monetary Developments," CEPR Discussion Papers 7036, C.E.P.R. Discussion Papers.
  3. Gabriele Galati & Peter Heemeijer & Richhild Moessner, 2011. "How do inflation expectations form? New insights from a high-frequency survey," BIS Working Papers 349, Bank for International Settlements.
  4. Carrasco, Carlos A., 2013. "El Nuevo Consenso Macroeconómico y la mediocridad del crecimiento económico en México
    [New Consensus Macroeconomics and the mediocrity of economic growth in Mexico]
    ," MPRA Paper 53391, University Library of Munich, Germany.
  5. Bosworth, Barry & Flaaen, Aaron, 2009. "America's Financial Crisis: The End of an Era," ADBI Working Papers 142, Asian Development Bank Institute.
  6. Bharat Trehan, 2009. "Survey measures of expected inflation and the inflation process," Working Paper Series 2009-10, Federal Reserve Bank of San Francisco.
  7. Todd E. Clark & Troy Davig, 2008. "An empirical assessment of the relationships among inflation and short- and long-term expectations," Research Working Paper RWP 08-05, Federal Reserve Bank of Kansas City.

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