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Expected and Realized Inflation in Historical Perspective

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  • Carola Binder
  • Rupal Kamdar

Abstract

This paper provides historical context for the relationship between expected and realized inflation. We begin with a discussion of early theoretical thought about how inflation expectations are formed. Then, we discuss survey- and asset-based measures of inflation expectations and assess their empirical relationship with realized inflation. Expected and realized inflation are strongly correlated over long samples, but over short samples the correlations can weaken. Lastly, to better understand the subtleties of the interaction between expected and realized inflation over short-lived but important events, we provide a narrative account of the relationship during the Great Depression of the 1930s, the Great Inflation of the 1970s, the Great Recession of 2008–2009, and the recent COVID-19 pandemic. These episodes offer compelling evidence of the importance of expectations and policy regime changes in inflation dynamics.

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  • Carola Binder & Rupal Kamdar, 2022. "Expected and Realized Inflation in Historical Perspective," Journal of Economic Perspectives, American Economic Association, vol. 36(3), pages 131-156, Summer.
    • Handle: RePEc:aea:jecper:v:36:y:2022:i:3:p:131-56
    DOI: 10.1257/jep.36.3.131
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    3. Massimiliano Marcellino & Dalibor Stevanovic, 2022. "The demand and supply of information about inflation," CIRANO Working Papers 2022s-27, CIRANO.
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    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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