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Long-term inflation expectations and the transmission of monetary policy shocks: Evidence from a SVAR analysis

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  • Diegel, Max
  • Nautz, Dieter

Abstract

This paper investigates the role of long-term inflation expectations for the monetary transmission mechanism and the conduct of monetary policy in a structural VAR framework. In contrast to earlier studies, we find that U.S. long-term inflation expectations respond significantly to a monetary policy shock. In line with a re-anchoring channel of monetary policy, long-term inflation expectations play an important role for the transmission of monetary policy shocks to the rate of inflation. Structural scenario analysis suggests that the response of monetary policy to expectations shocks contributes to the stabilization of inflation and unemployment.

Suggested Citation

  • Diegel, Max & Nautz, Dieter, 2021. "Long-term inflation expectations and the transmission of monetary policy shocks: Evidence from a SVAR analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 130(C).
    • Handle: RePEc:eee:dyncon:v:130:y:2021:i:c:s0165188921001275
    DOI: 10.1016/j.jedc.2021.104192
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    Cited by:

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    2. Neri, Stefano, 2023. "Long-term inflation expectations and monetary policy in the euro area before the pandemic," European Economic Review, Elsevier, vol. 154(C).
    3. Ascari, Guido & Fasani, Stefano & Grazzini, Jakob & Rossi, Lorenza, 2023. "Endogenous uncertainty and the macroeconomic impact of shocks to inflation expectations," Journal of Monetary Economics, Elsevier, vol. 140(S), pages 48-63.
    4. Ahn, Hie Joo & Xie, Shihan & Yang, Choongryul, 2024. "Effects of monetary policy on household expectations: The role of homeownership," Journal of Monetary Economics, Elsevier, vol. 147(C).
    5. Diegel, Max, 2022. "Time-varying credibility, anchoring and the Fed's inflation target," Discussion Papers 2022/9, Free University Berlin, School of Business & Economics.
    6. Magyar Nemzeti Bank, 2025. "Monetary policy decision-making: how are household and firm heterogeneity incorporated in Hungary?," BIS Papers chapters, in: Bank for International Settlements (ed.), How can central banks take account of differences across households and firms for monetary policy?, volume 127, pages 131-146, Bank for International Settlements.
    7. Atsuki Hirata & Sohei Kaihatsu & Yoshiyasu Kasai & Hiroki Yamamoto & Jouchi Nakajima, 2024. "Effects and Side Effects of Unconventional Monetary Policy: A Shadow Rate Approach," Bank of Japan Working Paper Series 24-E-21, Bank of Japan.
    8. Bowen Fu & Chenghan Hou & Jan Pruser, 2025. "Assessing the Effects of Monetary Shocks on Macroeconomic Stars: A SMUC-IV Framework," Papers 2510.05802, arXiv.org, revised Dec 2025.
    9. Geiger, Martin & Gründler, Daniel & Scharler, Johann, 2023. "Monetary policy shocks and consumer expectations in the euro area," Journal of International Economics, Elsevier, vol. 140(C).
    10. Basse, Tobias & Wegener, Christoph, 2022. "Inflation expectations: Australian consumer survey data versus the bond market," Journal of Economic Behavior & Organization, Elsevier, vol. 203(C), pages 416-430.
    11. McNeil, James, 2023. "Monetary policy and the term structure of inflation expectations with information frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    12. Hao Dong & Yingrong Zheng & Na Li, 2023. "Analysis of Systemic Risk Scenarios and Stabilization Effect of Monetary Policy under the COVID-19 Shock and Pharmaceutical Economic Recession," Sustainability, MDPI, vol. 15(1), pages 1-32, January.
    13. Christina Anderl & Guglielmo Maria Caporale, 2024. "Functional shocks to inflation expectations and real interest rates and their macroeconomic effects," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 160(4), pages 1543-1575, November.
    14. Natalie Burr, 2025. "Do inflation expectations respond to monetary policy? An empirical analysis for the United Kingdom," Bank of England working papers 1109, Bank of England.
    15. Shiu‐Sheng Chen, 2023. "A direct approach to Kilian–Lewis style counterfactual analysis in vector autoregression models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(7), pages 1068-1076, November.
    16. Stefano Fasani & Giuseppe Pagano Giorgianni & Valeria Patella & Lorenza Rossi, 2025. "Belief Distortions and Uncertainty About Inflation," CESifo Working Paper Series 12209, CESifo.
    17. Marina Albanese & Francesco Busato & Monica Varlese, 2026. "Inflation-Based Fiscal Consolidation: Does Speed Matter?," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 12(1), pages 441-475, March.
    18. Sohei Kaihatsu & Shogo Nakano & Hiroki Yamamoto, 2024. "Macroeconomic Impact of Shifts in Long-term Inflation Expectations," Bank of Japan Working Paper Series 24-E-18, Bank of Japan.

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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