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Fitting observed inflation expectations

  • Del Negro, Marco
  • Eusepi, Stefano

The paper provides evidence on the extent to which inflation expectations generated by a standard Christiano et al. (2005)/Smets and Wouters (2003)-type DSGE model are in line with what observed in the data. We consider three variants of this model that differ in terms of the behavior of, and the public's information on, the central banks' inflation target, allegedly a key determinant of inflation expectations. We find that (i) time-variation in the inflation target is needed to capture the evolution of expectations during the post-Volcker period; (ii) the variant where agents have Imperfect Information is strongly rejected by the data; (iii) inflation expectations appear to contain information that is not present in the other series used in estimation, and (iv) none of the models fully capture the dynamics of this variable.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 12 ()
Pages: 2105-2131

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:12:p:2105-2131
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
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  18. Timothy Cogley & Argia M. Sbordone, 2006. "Trend inflation and inflation persistence in the New Keynesian Phillips curve," Staff Reports 270, Federal Reserve Bank of New York.
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