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Inflation regimes and inflation expectations

  • Joseph E. Gagnon

There has been much talk in the popular press about the difficulty of attaining credibility in the bond markets for the low-inflation policies that have been adopted by a number of central banks in recent years. This credibility problem is particularly severe for those countries that have a history of high inflation. Gaining credibilty is often viewed in the context of learning by the public about the central bank's true intentions. However, this paper argues that a more important aspect of credibility--at lease for long-term inflation expectations--may be public views about how future changes in personnel, electoral results, or economic shocks may affect central bank behavior. In other words, there is always a positive probability that the current regime will end. Views about the nature of possible future regimes are likely to be influenced by observed past regimes.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 581.

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Date of creation: 1997
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Handle: RePEc:fip:fedgif:581
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  1. Frederic S. Mishkin, 1991. "Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates," NBER Working Papers 3632, National Bureau of Economic Research, Inc.
  2. Baillie, Richard T & Chung, Ching-Fan & Tieslau, Margie A, 1996. "Analysing Inflation by the Fractionally Integrated ARFIMA-GARCH Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(1), pages 23-40, Jan.-Feb..
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  7. Boero,Gianna & Smith,Jeremy & Wallis,Kenneth F, 2006. "Uncertainty and disagreement in economic prediction : the Bank of England Survey of External Forecasters," The Warwick Economics Research Paper Series (TWERPS) 811, University of Warwick, Department of Economics.
  8. Fischer, Stanley, 1990. "Rules versus discretion in monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 21, pages 1155-1184 Elsevier.
  9. John Simon, 1996. "A Markov-switching Model of Inflation in Australia," RBA Research Discussion Papers rdp9611, Reserve Bank of Australia.
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  12. Doug Hostland, 1995. "CHANGES IN THE INFLATION PROCESS IN CANADA: Evidence and Implications," Macroeconomics 9508001, EconWPA.
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  14. Lahiri, Kajal & Teigland, Christie, 1987. "On the normality of probability distributions of inflation and GNP forecasts," International Journal of Forecasting, Elsevier, vol. 3(2), pages 269-279.
  15. Fuhrer, Jeffrey C, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1183-1209, November.
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