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On the sources of movements in inflation expectations : a few insights from a VAR model

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  • Yash P. Mehra
  • Christopher Herrington

Abstract

Using a VAR model that includes a survey measure of expected inflation, this article investigates the responses of expected inflation to temporary shocks to macroeconomic variables during three sample periods, 1953:1--1979:1, 1979:2--2001:1, and 1985:1--2007:1. Shocks to actual inflation, commodity prices, and expected inflation itself have been three major sources of movement in expected inflation, together explaining over 80 percent of the variability in expected inflation. Positive shocks to actual inflation, commodity prices, and expected inflation itself lead to increases in expected inflation that are large and long-lasting in the pre-1979 sample period, but muted and short-lived in post-1979 sample periods. Oil price shocks have only transitory effects on expected inflation. The positive response of expected inflation to higher oil prices found in the pre-1979 sample period is absent in post-1979 sample periods, suggesting that the Federal Reserve may have earned credibility.

Suggested Citation

  • Yash P. Mehra & Christopher Herrington, 2008. "On the sources of movements in inflation expectations : a few insights from a VAR model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 121-146.
  • Handle: RePEc:fip:fedreq:y:2008:i:spr:p:121-146:n:v.94no.2
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Nikita Céspedes, 2014. "General Equilibrium Analysis of Conditional Cash Transfers," Working Papers 2014-25, Peruvian Economic Association.
    2. Sane, Renuka, 2017. "Stock Market Participation in the Aftermath of an Accounting Scandal," Working Papers 17/198, National Institute of Public Finance and Policy.
    3. Anderson, Gareth & Maule, Becky, 2014. "Assessing the risk to inflation from inflation expectations," Bank of England Quarterly Bulletin, Bank of England, vol. 54(2), pages 148-162.
    4. Ueda, Kozo, 2010. "Determinants of households' inflation expectations in Japan and the United States," Journal of the Japanese and International Economies, Elsevier, pages 503-518.
    5. Bharat Trehan, 2015. "Survey Measures of Expected Inflation and the Inflation Process," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 207-222, February.
    6. Koop, Gary & Onorante, Luca, 2011. "Estimating Phillips Curves in Turbulent Times using the ECB’s Survey of Professional Forecasters," SIRE Discussion Papers 2011-19, Scottish Institute for Research in Economics (SIRE).
    7. Clark, Todd E. & Davig, Troy, 2011. "Decomposing the declining volatility of long-term inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 981-999, July.
    8. Benjamin Wong, 2015. "Do Inflation Expectations Propagate the Inflationary Impact of Real Oil Price Shocks?: Evidence from the Michigan Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(8), pages 1673-1689, December.
    9. Scott Davis, 2012. "The Effect of Commodity Price Shocks on Underlying Inflation: The Role of Central Bank Credibility," Working Papers 272012, Hong Kong Institute for Monetary Research.
    10. Petra Gerlach-Kristen & Richhild Mössner, 2014. "Inflation Expectations, Central Bank Credibility and the Global Financial Crisis," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 150(II), pages 55-87, June.
    11. Taniya Ghosh & Sohini Sahu & Siddhartha Chattopadhyay, 2017. "Households' Inflation Expectations in India: Role of Economic Policy Uncertainty and Global Financial Uncertainty Spill-over," Working Papers id:11890, eSocialSciences.
    12. Gary Koop & Luca Onorante, 2011. "Estimating Phillips Curves in Turbulent Times using the ECBs Survey of Professional Forecasters," Working Papers 1109, University of Strathclyde Business School, Department of Economics.
    13. Davis, J. Scott & Presno, Ignacio, 2014. "Inflation targeting and the anchoring of inflation expectations: cross-country evidence from consensus forecasts," Globalization and Monetary Policy Institute Working Paper 174, Federal Reserve Bank of Dallas.
    14. Gerunov, Anton, 2013. "Връзка Между Икономическите Очаквания И Стопанската Динамика В Ес-27
      [Linkages Between Expectations and Economic Dynamics in EU-27]
      ," MPRA Paper 68795, University Library of Munich, Germany.
    15. Davis, Scott & Mack, Adrienne, 2013. "Cross-country variation in the anchoring of inflation expectations," Staff Papers, Federal Reserve Bank of Dallas, issue Oct.
    16. Aleksei Netšunajev & Lars Winkelmann, 2016. "International dynamics of inflation expectations," SFB 649 Discussion Papers SFB649DP2016-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    17. Davis, J. Scott, 2012. "Central bank credibility and the persistence of inflation and inflation expectations," Globalization and Monetary Policy Institute Working Paper 117, Federal Reserve Bank of Dallas, revised 01 Apr 2014.
    18. Todd E. Clark & Troy A. Davig, 2008. "An empirical assessment of the relationships among inflation and short- and long-term expectations," Research Working Paper RWP 08-05, Federal Reserve Bank of Kansas City.
    19. Ishak-Kasim, Syurkani & Ahmed, Abdullahi D., 2009. "Inflation expectations formation and financial stability in Indonesia," MPRA Paper 27763, University Library of Munich, Germany.
    20. repec:ijc:ijcjou:y:2017:q:2:a:1 is not listed on IDEAS

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