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Deflating Inflation Expectations: The Implications of Inflation's Simple Dynamics

Author

Listed:
  • Cecchetti, Stephen G
  • Feroli, Michael
  • Hooper, Peter
  • Kashyap, Anil K
  • Schoenholtz, Kermit

Abstract

This report examines the behavior of inflation in the United States since 1984 (updating Cecchetti et al. (2007)). Over this period, the change in inflation is negatively serially correlated, and the change in inflation is best predicted by a statistical model that includes only information from the two most recent quarters. We find that the level of inflation fluctuates around a slowly changing trend that we call the local mean of inflation. Few variables add extra explanatory power for inflation once the local mean is taken into account. This local mean is itself well characterized by a random walk. Labor market slack has a statistically significant, but quantitatively small, effect on the local mean and inflation expectations have no effect. Some financial conditions that are influenced by monetary policy have larger effects on the local mean. Concretely, this means that one-off moves in labor market slack or inflation expectations that are not mirrored in broader indicators of inflation pressures are unlikely to be predictive of changes in trend inflation.

Suggested Citation

  • Cecchetti, Stephen G & Feroli, Michael & Hooper, Peter & Kashyap, Anil K & Schoenholtz, Kermit, 2017. "Deflating Inflation Expectations: The Implications of Inflation's Simple Dynamics," CEPR Discussion Papers 11925, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11925
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    References listed on IDEAS

    as
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Inflation risks and inflation expectations
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2019-02-25 13:49:59

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    Cited by:

    1. McLeay, Michael & Tenreyro, Silvana, 2018. "Optimal inflation and the identification of the Phillips Curve," LSE Research Online Documents on Economics 90373, London School of Economics and Political Science, LSE Library.
    2. Mengheng Li & Siem Jan (S.J.) Koopman, 2018. "Unobserved Components with Stochastic Volatility in U.S. Inflation: Estimation and Signal Extraction," Tinbergen Institute Discussion Papers 18-027/III, Tinbergen Institute.
    3. repec:pal:buseco:v:53:y:2018:i:3:d:10.1057_s11369-018-0081-5 is not listed on IDEAS

    More about this item

    Keywords

    Federal Open Market Committee; FOMC; inflation dynamics; Inflation expectations; inflation target; inflation trend; monetary policy; Philip Curve; price stability; US Monetary Policy Forum;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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