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The Dynamics of UK and US Inflation Expectations

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  • Deborah Gefang

    ()
    (University of Lancaster)

  • Gary Koop

    ()
    (University of Strathclyde, Rimini Center for Economic Analysis.)

  • Simon M. Potter

    ()
    (Federal Reserve Bank of New York)

Abstract

This paper investigates the relationship between short term and long term inflation expectations in the US and the UK with a focus on inflation pass through (i.e. how changes in short term expecta tions affect long term expectations). An econometric methodology is used which allows us to uncover the relationship between inflation pass through and various explanatory variables. We relate our empirical results to theoretical models of anchored, contained and unmoored inflation expectations. For neither country do we find anchored or unmoored inflation expectations. For the US, contained inflation expectations are found. For the UK, our fi ndings are not consistent with the speci c model of contained inflation expectations presented here, but are consistent with a broader view of expectations being constrained by the existence of an inflation target.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 14_09.

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Date of creation: Jan 2009
Date of revision: Jan 2009
Handle: RePEc:rim:rimwps:14_09

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References

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  1. Andrew Ang & Geert Bekaert & Min Wei, 2005. "Do Macro Variables, Asset Markets or Surveys Forecast Inflation Better?," NBER Working Papers 11538, National Bureau of Economic Research, Inc.
  2. James H. Stock & Mark W. Watson, 2006. "Why Has U.S. Inflation Become Harder to Forecast?," NBER Working Papers 12324, National Bureau of Economic Research, Inc.
  3. Todd E. Clark & Stephen J. Terry, 2010. "Time Variation in the Inflation Passthrough of Energy Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1419-1433, October.
  4. Jon Faust & Dale W. Henderson, 2004. "Is inflation targeting best-practice monetary policy?," International Finance Discussion Papers 807, Board of Governors of the Federal Reserve System (U.S.).
  5. Todd E.Clark & Taeyoung Doh, 2011. "A Bayesian evaluation of alternative models of trend inflation," Research Working Paper RWP 11-16, Federal Reserve Bank of Kansas City.
  6. Refet S. G├╝rkaynak & Andrew T. Levin & Eric T. Swanson, 2006. "Does inflation targeting anchor long-run inflation expectations? evidence from long-term bond yields in the U.S., U.K., and Sweden," Working Paper Series 2006-09, Federal Reserve Bank of San Francisco.
  7. Geweke, John & Keane, Michael, 2007. "Smoothly mixing regressions," Journal of Econometrics, Elsevier, vol. 138(1), pages 252-290, May.
  8. James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
  9. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
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Cited by:
  1. Nyberg, Henri & Saikkonen, Pentti, 2014. "Forecasting with a noncausal VAR model," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 536-555.
  2. Till Strohsal & Lars Winkelmann, 2012. "Assessing the Anchoring of Inflation Expectations," SFB 649 Discussion Papers SFB649DP2012-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. J. Easaw & R. Golinelli & M. Malgarini, 2012. "Do Households Anchor their Inflation Expectations? Theory and Evidence from a Household Survey," Working Papers wp842, Dipartimento Scienze Economiche, Universita' di Bologna.

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