IDEAS home Printed from https://ideas.repec.org/p/fip/fedkrw/rwp18-01.html
   My bibliography  Save this paper

Does Communicating a Numerical Inflation Target Anchor Inflation Expectations? Evidence & Bond Market Implications

Author

Listed:
  • Bundick, Brent

    () (Federal Reserve Bank of Kansas City)

  • Smith, Andrew Lee

    () (Federal Reserve Bank of Kansas City)

Abstract

High-frequency empirical evidence suggests that inflation expectations in the United States became better anchored after the Federal Reserve began communicating a numerical inflation target. Using an event-study approach, we find that forward measures of inflation compensation became unresponsive to news about current inflation after the adoption of an explicit inflation target. In contrast, we find that forward measures of nominal compensation in Japan continued to drift with news about current inflation, even after the Bank of Japan adopted a numerical inflation target. These empirical findings have implications for the term structure of interest rates in the United States. In a calibrated macro-finance model, we show that the apparent anchoring of inflation expectations implies lower term premiums in longer-term bond yields and decreases the slope of the yield curve.

Suggested Citation

  • Bundick, Brent & Smith, Andrew Lee, 2018. "Does Communicating a Numerical Inflation Target Anchor Inflation Expectations? Evidence & Bond Market Implications," Research Working Paper RWP 18-1, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp18-01
    as

    Download full text from publisher

    File URL: https://dx.doi.org/10.18651/RWP2018-01
    File Function: https://dx.doi.org/10.18651/RWP2018-01
    Download Restriction: no

    References listed on IDEAS

    as
    1. Roberts Bryan W, 2009. "The Macroeconomic Impacts of the 9/11 Attack: Evidence from Real-Time Forecasting," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 15(2), pages 1-29, July.
    2. repec:cup:apsrev:v:103:y:2009:i:03:p:387-406_99 is not listed on IDEAS
    3. Yasuhide Okuyama & Joost R. Santos, 2014. "Disaster Impact And Input--Output Analysis," Economic Systems Research, Taylor & Francis Journals, vol. 26(1), pages 1-12, March.
    4. repec:cen:wpaper:15-21 is not listed on IDEAS
    5. Bradley T. Ewing & Jamie Brown Kruse, 2002. "The Impact of Project Impact on the Wilmington, North Carolina, Labor Market," Public Finance Review, , vol. 30(4), pages 296-309, July.
    6. Jeffrey A. Groen & Anne E. Polivka, 2008. "The Effect of Hurricane Katrina on the Labor Market Outcomes of Evacuees," American Economic Review, American Economic Association, vol. 98(2), pages 43-48, May.
    7. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, Oxford University Press, pages 823-866.
    8. Tim Harries, 2012. "The anticipated emotional consequences of adaptive behaviour—impacts on the take-up of household flood-protection measures," Environment and Planning A, Pion Ltd, London, vol. 44(3), pages 649-668, March.
    9. repec:pri:cheawb:paxson_rouse_katrina_returns.pdf is not listed on IDEAS
    10. Browne, Mark J & Hoyt, Robert E, 2000. "The Demand for Flood Insurance: Empirical Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 291-306, May.
    11. repec:pri:cheawb:paxson_rouse_katrina_returns is not listed on IDEAS
    12. W. Viscusi & Richard Zeckhauser, 2006. "National survey evidence on disasters and relief: Risk beliefs, self-interest, and compassion," Journal of Risk and Uncertainty, Springer, vol. 33(1), pages 13-36, September.
    13. Jeffrey A. Groen & Anne E. Polivka, 2008. "The Effect of Hurricane Katrina on the Labor Market Outcomes of Evacuees," Working Papers 415, U.S. Bureau of Labor Statistics.
    14. Paulo Guimaraes & Frank L. Hefner & Douglas P. Woodward, 1993. "Wealth And Income Effects Of Natural Disasters: An Econometric Analysis Of Hurricane Hugo," The Review of Regional Studies, Southern Regional Science Association, vol. 23(2), pages 97-114, Fall.
    15. Alice Fothergill & Lori Peek, 2004. "Poverty and Disasters in the United States: A Review of Recent Sociological Findings," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 32(1), pages 89-110, May.
    16. Eduardo Cavallo & Sebastian Galiani & Ilan Noy & Juan Pantano, 2013. "Catastrophic Natural Disasters and Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1549-1561, December.
    17. Danielle Venn, 2012. "Helping Displaced Workers Back Into Jobs After a Natural Disaster: Recent Experiences in OECD Countries," OECD Social, Employment and Migration Working Papers 142, OECD Publishing.
    18. Christina Paxson & Cecilia Rouse, 2008. "Returning to New Orleans after Hurricane Katrina," Working Papers 1052, Princeton University, Department of Economics, Center for Economic Policy Studies..
    19. Matthew E. Kahn, 2005. "The Death Toll from Natural Disasters: The Role of Income, Geography, and Institutions," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 271-284, May.
    20. Aric Shafran, 2011. "Self-protection against repeated low probability risks," Journal of Risk and Uncertainty, Springer, vol. 42(3), pages 263-285, June.
    21. Kousky, Carolyn, 2014. "Informing climate adaptation: A review of the economic costs of natural disasters," Energy Economics, Elsevier, vol. 46(C), pages 576-592.
    22. Michio Naoi & Miki Seko & Takuya Ishino, 2012. "Earthquake Risk in Japan: Consumers' Risk Mitigation Responses After the Great East Japan Earthquake," Journal of Economic Issues, Taylor & Francis Journals, vol. 46(2), pages 519-530.
    23. Hartley, Daniel & Gallagher, Justin, 2014. "Household Finance after a Natural Disaster: The Case of Hurricane Katrina," Working Paper 1406, Federal Reserve Bank of Cleveland.
    24. repec:pri:cepsud:168rouse is not listed on IDEAS
    25. Tim Harries, 2012. "The Anticipated Emotional Consequences of Adaptive Behaviour—Impacts on the Take-up of Household Flood-Protection Measures," Environment and Planning A, , vol. 44(3), pages 649-668, March.
    26. Christina Paxson & Cecilia Elena Rouse, 2008. "Returning to New Orleans after Hurricane Katrina," American Economic Review, American Economic Association, vol. 98(2), pages 38-42, May.
    27. Christina Paxson & Cecilia Rouse, 2008. "Returning to New Orleans after Hurricane Katrina," Working Papers 1126, Princeton University, Woodrow Wilson School of Public and International Affairs, Center for Health and Wellbeing..
    28. repec:pri:indrel:dsp0173666450b is not listed on IDEAS
    29. Christina Paxson & Cecilia E. Rouse, 2008. "Returning to New Orleans after Hurricane Katrina," Working Papers 1043, Princeton University, Department of Economics, Industrial Relations Section..
    30. Amy K. Donahue, 2014. "Risky Business: Willingness to Pay for Disaster Preparedness," Public Budgeting & Finance, Wiley Blackwell, vol. 34(4), pages 100-119, December.
    31. Jeffrey A. Groen† & Mark J. Kutzbach & Anne E. Polivka‡, 2015. "Storms and Jobs: The Effect of Hurricanes on Individuals’ Employment and Earnings over the Long Term," Working Papers 15-21r, Center for Economic Studies, U.S. Census Bureau.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Monetary Policy; Inflation; Structural Breaks; Term Structure of Interest Rates;

    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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedkrw:rwp18-01. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lu Dayrit). General contact details of provider: http://edirc.repec.org/data/frbkcus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.