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Decaying Expectations: What Inflation Forecasts Tell Us about the Anchoring of Inflation Expectations

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  • Aaron Mehrotra

    (Bank for International Settlements)

  • James Yetman

    (Bank for International Settlements)

Abstract

Well-anchored inflation expectations are considered to be a reflection of credible monetary policy. In the past, anchoring has typically been assessed using either long-run inflation surveys or breakeven inflation rates on financial assets with long maturities. Here we propose an alternative measure of inflation anchoring that makes full use of readily available, multiple-horizon, fixed-event forecasts. We show that a model where forecasts are assumed to diverge from a perceived longrun anchor towards actual inflation as the forecast horizon shortens fits the data well. It also provides simple estimates of the degree to which inflation expectations are anchored. We use our methodology to examine how inflation anchoring has evolved in forty-four economies.

Suggested Citation

  • Aaron Mehrotra & James Yetman, 2018. "Decaying Expectations: What Inflation Forecasts Tell Us about the Anchoring of Inflation Expectations," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 55-101, December.
    • Handle: RePEc:ijc:ijcjou:y:2018:q:4:a:2
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    References listed on IDEAS

    as
    1. Siklos, Pierre L., 2013. "Sources of disagreement in inflation forecasts: An international empirical investigation," Journal of International Economics, Elsevier, vol. 90(1), pages 218-231.
    2. Aaron Mehrotra & James Yetman, 2014. "How anchored are inflation expectations in Asia? Evidence from surveys of professional forecasters," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 181-191, Bank for International Settlements.
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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