IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/476.html
   My bibliography  Save this paper

Fitting observed inflation expectations

Author

Listed:
  • Marco Del Negro
  • Stefano Eusepi

Abstract

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.

Suggested Citation

  • Marco Del Negro & Stefano Eusepi, 2010. "Fitting observed inflation expectations," Staff Reports 476, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:476
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr476.html
    Download Restriction: no
    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr476.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Glenn D. Rudebusch & Eric T. Swanson, 2012. "The Bond Premium in a DSGE Model with Long-Run Real and Nominal Risks," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 105-143, January.
    2. 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.
    3. S. Boragan Aruoba, 2008. "Data Revisions Are Not Well Behaved," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 319-340, March.
    4. 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.
    5. S. Boragan Aruoba & Frank Schorfheide, 2011. "Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 60-90, January.
    6. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
    7. Justiniano, Alejandro & Primiceri, Giorgio E. & Tambalotti, Andrea, 2010. "Investment shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 132-145, March.
    8. 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.
    9. Peter N. Ireland, 2007. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1851-1882, December.
    10. Yongsung Chang & Sun-Bin Kim, 2006. "From Individual To Aggregate Labor Supply: A Quantitative Analysis Based On A Heterogeneous Agent Macroeconomy ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 1-27, February.
    11. Del Negro, Marco & Schorfheide, Frank, 2008. "Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1191-1208, October.
    12. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
    13. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," NBER Chapters,in: NBER Macroeconomics Annual 2003, Volume 18, pages 209-270 National Bureau of Economic Research, Inc.
    14. Martin Melecký & Diego Rodríguez Palenzuela & Ulf Söderström, 2009. "Inflation Target Transparency and the Macroeconomy," Central Banking, Analysis, and Economic Policies Book Series,in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 10, pages 371-411 Central Bank of Chile.
    15. Marco Del Negro & Frank Schorfheide, 2009. "Monetary Policy Analysis with Potentially Misspecified Models," American Economic Review, American Economic Association, vol. 99(4), pages 1415-1450, September.
    16. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    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. Frank Schorfheide, 2005. "Learning and Monetary Policy Shifts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 392-419, April.
    19. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
    20. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
    21. Klaus Adam & Mario Padula, 2011. "Inflation Dynamics And Subjective Expectations In The United States," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 13-25, January.
    22. 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 682-686, November.
    23. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2007. "On the Fit of New Keynesian Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 123-143, April.
    24. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    25. Michael T. Kiley, 2008. "Monetary policy actions and long-run inflation expectations," Finance and Economics Discussion Series 2008-03, Board of Governors of the Federal Reserve System (U.S.).
    26. Fabio Canova & Luca Gambetti, 2010. "Do Expectations Matter? The Great Moderation Revisited," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 183-205, July.
    27. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 387-422.
    28. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
    29. Marco Del Negro & Frank Schorfheide, 2004. "Priors from General Equilibrium Models for VARS," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 643-673, May.
    30. Ricardo Nunes, 2010. "Inflation Dynamics: The Role of Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1161-1172, September.
    31. Marc P. Giannoni & Jean Boivin, 2005. "DSGE Models in a Data-Rich Environment," Computing in Economics and Finance 2005 431, Society for Computational Economics.
    32. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    33. Fabio Milani, 2011. "Expectation Shocks and Learning as Drivers of the Business Cycle," Economic Journal, Royal Economic Society, vol. 121(552), pages 379-401, May.
    34. Andolfatto, David & Hendry, Scott & Moran, Kevin, 2008. "Are inflation expectations rational?," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 406-422, March.
    35. Thomas A. Lubik & Frank Schorfheide, 2007. "Testing for Indeterminacy: An Application to U.S. Monetary Policy: Reply," American Economic Review, American Economic Association, vol. 97(1), pages 530-533, March.
    36. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    37. Miles S. Kimball & Matthew D. Shapiro, 2008. "Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?," NBER Working Papers 14208, National Bureau of Economic Research, Inc.
    38. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
    39. Padula, Mario & Backé, Peter, 2003. "Inflation dynamics and subjective expectations in the United States," Working Paper Series 222, European Central Bank.
    40. John Geweke, 2007. "Bayesian Model Comparison and Validation," American Economic Review, American Economic Association, vol. 97(2), pages 60-64, May.
    41. 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.
    42. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
    43. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    44. Timothy Cogley & Argia M. Sbordone, 2008. "Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve," American Economic Review, American Economic Association, vol. 98(5), pages 2101-2126, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Banks and banking; Central ; Inflation (Finance) ; Inflation targeting ; Bayesian statistical decision theory;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:fednsr:476. 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: (Amy Farber). General contact details of provider: http://edirc.repec.org/data/frbnyus.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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.