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Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)

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Abstract

Economists and economic policymakers believe that households' and firms' expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.

Suggested Citation

  • Jeremy B. Rudd, 2021. "Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)," Finance and Economics Discussion Series 2021-062, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2021-62
    DOI: 10.17016/FEDS.2021.062
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    References listed on IDEAS

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    10. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 197-232, January.
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    Cited by:

    1. Balakrishnan, Pulapre & Parameswaran, Mavannoor, 2025. "Inflation in India: Dynamics, distributional impact and policy implication," Structural Change and Economic Dynamics, Elsevier, vol. 74(C), pages 556-566.
    2. Panovska, Irina & Ramamurthy, Srikanth, 2022. "Decomposing the output gap with inflation learning," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).
    3. Christian P Pinshi, 2022. "Ciblage des prévisions d'inflation : Un nouveau cadre pour la politique monétaire ?," Working Papers hal-03548273, HAL.
    4. Pedro Elosegui & Máximo Sangiácomo, 2024. "Firm's Price Expectations: An Empirical Analysis using BCRAs' Survey of Business Economic Perspectives," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(83), pages 97-116, May.
    5. Monique Reid & Pierre Siklos, 2023. "Rationality and biases insights from disaggregated firm level inflation expectations data," Working Papers 11050, South African Reserve Bank.
    6. PINSHI, Christian P., 2022. "Inflation-Forecast Targeting: A New Framework for Monetary Policy?," MPRA Paper 111709, University Library of Munich, Germany.
    7. Emanuel Kohlscheen, 2021. "What does machine learning say about the drivers of inflation?," BIS Working Papers 980, Bank for International Settlements.

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    Keywords

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    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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