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Long memory in inflation expectations: evidence from international expectations

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  • Joseph E. Gagnon

Abstract

This study provides evidence that 10-year-ahead inflation expectations adapt very slowly to changes in realized inflation. This evidence derives primarily from yields on 10-year government bonds in a sample of OECD countries, including inflation-indexed bonds where they are available. The study examines both the cross-country and time-series behavior of interest rates and inflation rates. For the United States, additional evidence is provided from a survey of 10-year inflation expectations held by market participants. This study does not present a theoretical model of expectations formation. However, long memory of the type documented in this study would be implied by a model of multiple inflationary regimes in which agents base their probability distributions of future regimes on past inflationary experience.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1996/538/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1996/538/ifdp538.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 538.

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Date of creation: 1996
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Handle: RePEc:fip:fedgif:538

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Keywords: Inflation (Finance);

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  1. Darby, Michael R, 1975. "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Western Economic Association International, vol. 13(2), pages 266-76, June.
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