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

  • Yash P. Mehra
  • Christopher Herrington

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.

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Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

Volume (Year): (2008)
Issue (Month): Spr ()
Pages: 121-146

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Handle: RePEc:fip:fedreq:y:2008:i:spr:p:121-146:n:v.94no.2
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  1. Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1163-1212, May.
  2. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
  3. Blanchard, Olivier J & Galí, Jordi, 2008. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s so Different from the 1970s?," CEPR Discussion Papers 6631, C.E.P.R. Discussion Papers.
  4. Leduc, Sylvain & Sill, Keith & Stark, Tom, 2007. "Self-fulfilling expectations and the inflation of the 1970s: Evidence from the Livingston Survey," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 433-459, March.
  5. Eichenbaum, Martin, 1998. "Costly capital reallocation and the effects of government spending : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 195-209, June.
  6. Olivier J. Blanchard & Jordi Galí, 2007. "The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so different from the 1970s?," NBER Chapters, in: International Dimensions of Monetary Policy, pages 373-421 National Bureau of Economic Research, Inc.
  7. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," NBER Chapters, in: NBER Macroeconomics Annual 2003, Volume 18, pages 209-270 National Bureau of Economic Research, Inc.
  8. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
  9. repec:fip:fedgsq:y:2007:i:jul10 is not listed on IDEAS
  10. Marvin Goodfriend, 1993. "Interest rate policy and the inflation scare problem: 1979-1992," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  11. Ben S. Bernanke, 2007. "Inflation expectations and inflation forecasting," Speech 306, Board of Governors of the Federal Reserve System (U.S.).
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