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Anchored inflation expectations

Author

Listed:
  • Carlos Carvalho
  • Stefano Eusepi
  • Emanuel Moench
  • Bruce Preston

Abstract

We develop a theory of low-frequency movements in inflation expectations, and use it to interpret joint dynamics of inflation and inflation expectations for the United States and other countries over the post-war period. In our theory long-run inflation expectations are endogenous. They are driven by short-run inflation surprises, in a way that depends on recent forecasting performance and monetary policy. This distinguishes our theory from common explanations of low-frequency properties of inflation. The model, estimated using only inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations and identifies episodes of unanchored expectations.

Suggested Citation

  • Carlos Carvalho & Stefano Eusepi & Emanuel Moench & Bruce Preston, 2020. "Anchored inflation expectations," CAMA Working Papers 2020-25, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2020-25
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2020-03/25_2020_carvalho_eusepi_moench.pdf
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    References listed on IDEAS

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    1. Marcet, Albert & Sargent, Thomas J, 1989. "Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1306-1322, December.
    2. Gibbs, Christopher G. & Kulish, Mariano, 2017. "Disinflations in a model of imperfectly anchored expectations," European Economic Review, Elsevier, vol. 100(C), pages 157-174.
    3. Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
    4. Natoli, Filippo & Sigalotti, Laura, 2017. "A new indicator of inflation expectations anchoring," Working Paper Series 1996, European Central Bank.
    5. Monica Jain, 2019. "Perceived Inflation Persistence," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(1), pages 110-120, January.
    6. Jorge Galindo & Pablo Tamayo, "undated". "Credit Risk Assessment using Statistical and Machine Learning Methods as an Ingredient for Risk Modeling of Financial Intermediaries," Computing in Economics and Finance 1997 31, Society for Computational Economics.
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    Cited by:

    1. Del Negro, Marco & Lenza, Michele & Primiceri, Giorgio E. & Tambalotti, Andrea, 2020. "What’s up with the Phillips Curve?," Working Paper Series 2435, European Central Bank.
    2. Han, Zhao, 2021. "Low-frequency fiscal uncertainty," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 639-657.
    3. Coleman, Winnie & Nautz, Dieter, 2020. "The credibility of the ECB's inflation target in times of Corona: New evidence from an online survey," Discussion Papers 2020/11, Free University Berlin, School of Business & Economics.

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    More about this item

    Keywords

    Anchored expectations; inflation expectations; survey data;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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