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Inflation Targeting and the Anchoring of Inflation Expectations in the Western Hemisphere

In: Monetary Policy under Inflation Targeting

  • Refet S. Gürkaynak

    (Centre for Economic Policy Research)

  • Andrew T. Levin

    (Federal Reserve Board)

  • Andrew N. Marder

    (Board of Governors of the Federal Reserve System)

  • Eric T. Swanson

    (Federal Reserve Bank of San Francisco)

We investigate the extent to which long-run inflation expectations are well anchored in three western hemisphere countries—Canada, Chile, and the United States—using a high-frequency event-study analysis. Specifically, we use daily data on far-ahead forward inflation compensation—the difference between forward rates on nominal and inflation-indexed bonds—as an indicator of financial market perceptions of inflation risk and the expected level of inflation at long horizons. For the United States, we find that far-ahead forward inflation compensation reacts significantly to macroeconomic data releases, suggesting that long-run inflation expectations are not completely anchored. In contrast, the Canadian inflation compensation data do not exhibit significant sensitivity to either Canadian or U.S. macroeconomic news, consistent with the view that inflation targeting in Canada has been successful in anchoring long-run inflation expectations. Finally, while the requisite data for Chile is only available for a limited sample period (2002-2005), our results are consistent with the hypothesis that inflation targeting in Chile has also succeeded in anchoring long-run inflation expectations.

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This chapter was published in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Monetary Policy under Inflation Targeting, , chapter 11, pages 415-465, 2007.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v11c11pp415-465.
Handle: RePEc:chb:bcchsb:v11c11pp415-465
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