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On the sources of movements in inflation expectations : a few insights from a VAR model

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  • Yash P. Mehra
  • Christopher Herrington

Abstract

Using a VAR model that includes a survey measure of expected inflation, this article investigates the responses of expected inflation to temporary shocks to macroeconomic variables during three sample periods, 1953:1--1979:1, 1979:2--2001:1, and 1985:1--2007:1. Shocks to actual inflation, commodity prices, and expected inflation itself have been three major sources of movement in expected inflation, together explaining over 80 percent of the variability in expected inflation. Positive shocks to actual inflation, commodity prices, and expected inflation itself lead to increases in expected inflation that are large and long-lasting in the pre-1979 sample period, but muted and short-lived in post-1979 sample periods. Oil price shocks have only transitory effects on expected inflation. The positive response of expected inflation to higher oil prices found in the pre-1979 sample period is absent in post-1979 sample periods, suggesting that the Federal Reserve may have earned credibility.

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Bibliographic Info

Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

Volume (Year): (2008)
Issue (Month): Spr ()
Pages: 121-146

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Handle: RePEc:fip:fedreq:y:2008:i:spr:p:121-146:n:v.94no.2

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Related research

Keywords: Inflation (Finance) ; Macroeconomics ; Monetary policy;

References

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  1. Blanchard, Olivier J & Galí, Jordi, 2008. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s so Different from the 1970s?," CEPR Discussion Papers 6631, C.E.P.R. Discussion Papers.
  2. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
  3. Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series 2006-15, Board of Governors of the Federal Reserve System (U.S.).
  4. Sylvain Leduc & Keith Sill & Tom Stark, 2002. "Self-fulfilling expectations and the inflation of the 1970s: evidence from the Livingston Survey," Working Papers 02-13, Federal Reserve Bank of Philadelphia.
  5. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2003. "Disagreement about Inflation Expectations," Harvard Institute of Economic Research Working Papers 2011, Harvard - Institute of Economic Research.
  6. Marvin Goodfriend, 1993. "Interest rate policy and the inflation scare problem: 1979-1992," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  7. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
  8. Olivier J. Blanchard & Jordi Galí, 2007. "The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so different from the 1970s?," Working Papers 0711, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  9. Eichenbaum, Martin, 1998. "Costly capital reallocation and the effects of government spending : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 195-209, June.
  10. repec:fip:fedgsq:y:2007:i:jul10 is not listed on IDEAS
  11. Ben S. Bernanke, 2007. "Inflation expectations and inflation forecasting," Speech 306, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Bharat Trehan, 2009. "Survey measures of expected inflation and the inflation process," Working Paper Series 2009-10, Federal Reserve Bank of San Francisco.
  2. Ishak-Kasim, Syurkani & Ahmed, Abdullahi D., 2009. "Inflation expectations formation and financial stability in Indonesia," MPRA Paper 27763, University Library of Munich, Germany.
  3. Todd E. Clark & Troy Davig, 2009. "Decomposing the declining volatility of long-term inflation expectations," Research Working Paper RWP 09-05, Federal Reserve Bank of Kansas City.
  4. Koop, Gary & Onorante, Luca, 2012. "Estimating Phillips curves in turbulent times using the ECB's survey of professional forecasters," Working Paper Series 1422, European Central Bank.
  5. Ueda, Kozo, 2010. "Determinants of households' inflation expectations in Japan and the United States," Journal of the Japanese and International Economies, Elsevier, vol. 24(4), pages 503-518, December.
  6. 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.
  7. Scott Davis & Adrienne Mack, 2013. "Cross-country variation in the anchoring of inflation expectations," Staff Papers, Federal Reserve Bank of Dallas, issue Oct.
  8. 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.
  9. 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.

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