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Fitting observed inflation expectations

  • Marco Del Negro
  • Stefano Eusepi

This paper provides evidence on the extent to which inflation expectations generated by a standard Christiano et al. (2005)/Smets and Wouters (2003)–type DSGE model are in line with what is observed in the data. We consider three variants of this model that differ in terms of the behavior of, and the public’s information on, the central banks’ inflation target, allegedly a key determinant of inflation expectations. We find that: 1) time-variation in the inflation target is needed to capture the evolution of expectations during the post-Volcker period; 2) the variant where agents have imperfect information is strongly rejected by the data; 3) inflation expectations appear to contain information that is not present in the other series used in estimation; and 4) none of the models fully captures the dynamics of this variable.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 476.

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Date of creation: 2010
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Handle: RePEc:fip:fednsr:476
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  1. Sharon Kozicki & P.A. Tinsley, 1997. "Shifting endpoints in the term structure of interest rates," Research Working Paper 97-08, Federal Reserve Bank of Kansas City.
  2. Clark, Todd E. & Davig, Troy, 2011. "Decomposing the declining volatility of long-term inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 981-999, July.
  3. Martin Melecky & Diego Rodríguez Palenzuela & Ulf Söderström, 2008. "Inflation Target Transparency and the Macroeconomy," Working Papers Central Bank of Chile 490, Central Bank of Chile.
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  12. Thomas Lubik & Frank Schorfheide, 2002. "Testing for Indeterminacy:An Application to U.S. Monetary Policy," Economics Working Paper Archive 480, The Johns Hopkins University,Department of Economics, revised Jun 2003.
  13. Leduc, Sylvain & Sill, Keith & Stark, Tom, 2007. "Self-fulfilling expectations and the inflation of the 1970s: Evidence from the Livingston Survey," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 433-459, March.
  14. Jean Boivin & Marc Giannoni, 2006. "DSGE Models in a Data-Rich Environment," NBER Technical Working Papers 0332, National Bureau of Economic Research, Inc.
  15. Keen, Benjamin D., 2010. "The Signal Extraction Problem Revisited: A Note On Its Impact On A Model Of Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 14(03), pages 405-426, June.
  16. Rich, Robert W, 1989. "Testing the Rationality of Inflation Forecasts from Survey Data: Another Look at the SRC Expected Price Change Data," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 682-86, November.
  17. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
  18. Timothy Cogley & Argia M. Sbordone, 2006. "Trend inflation and inflation persistence in the New Keynesian Phillips curve," Staff Reports 270, Federal Reserve Bank of New York.
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