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Perceived Inflation Persistence

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  • Monica Jain
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    Abstract

    The Survey of Professional Forecasters (SPF) has had vast influence on research related to better understanding expectation formation and the behaviour of macroeconomic agents. Inflation expectations, in particular, have received a great deal of attention, since they play a crucial role in determining real interest rates, the expectations-augmented Phillips curve and monetary policy. One feature of the SPF that has surprisingly not been explored is the natural way in which it can be used to extract useful measures of inflation persistence. This paper presents a new measure of U.S. inflation persistence from the point of view of a professional forecaster, referred to as perceived inflation persistence. It is built via the implied autocorrelation function that follows from the estimates obtained using a forecaster-specific state-space model. Findings indicate that perceived inflation persistence has changed over time and that forecasters are more likely to view unexpected shocks to inflation as transitory, particularly since the mid-1990s. When compared to the autocorrelation function for actual inflation, forecasters react less to shocks than the actual inflation data would suggest, since they may engage in forecast smoothing.

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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 13-43.

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    Length: 44 pages
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:bca:bocawp:13-43

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    Related research

    Keywords: Inflation and prices; Econometric and statistical methods;

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    1. Olivier Coibion & Yuriy Gorodnichenko, 2012. "Information Rigidity and the Expectations Formation Process," IMF Working Papers 12/296, International Monetary Fund.
    2. Gourinchas, Pierre-Olivier & Tornell, Aaron, 2004. "Exchange rate puzzles and distorted beliefs," Journal of International Economics, Elsevier, vol. 64(2), pages 303-333, December.
    3. Patton, Andrew J. & Timmermann, Allan, 2010. "Why do forecasters disagree? Lessons from the term structure of cross-sectional dispersion," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 803-820, October.
    4. Francis X. Diebold & Lutz Kilian, 1997. "Measuring predictability: theory and macroeconomic applications," Working Papers 97-23, Federal Reserve Bank of Philadelphia.
    5. Maćkowiak, Bartosz & Wiederholt, Mirko, 2009. "Optimal sticky prices under rational inattention," Working Paper Series 1009, European Central Bank.
    6. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    7. Andrade, Philippe & Le Bihan, Hervé, 2013. "Inattentive professional forecasters," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 967-982.
    8. Lloyd B. Thomas, 1999. "Survey Measures of Expected U.S. Inflation," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 125-144, Fall.
    9. Spencer D. Krane, 2011. "Professional Forecasters' View of Permanent and Transitory Shocks to GDP," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 184-211, January.
    10. Joseph Engelberg & Charles F. Manski & Jared Williams, 2011. "Assessing the temporal variation of macroeconomic forecasts by a panel of changing composition," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(7), pages 1059-1078, November.
    11. Rhys Mendes & Stephen Murchison, 2009. "Declining Inflation Persistence in Canada: Causes and Consequences," Bank of Canada Review, Bank of Canada, vol. 2009(Winter), pages 5-18.
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