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Fitting observed inflation expectations

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Listed author(s):
  • 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.

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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
Handle: RePEc:fip:fednsr:476
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Keywords: Banks and banking; Central ; Inflation (Finance) ; Inflation targeting ; Bayesian statistical decision theory;

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Find related papers by 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

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