Relative Price Shocks, Inflation Expectations, and the Role of Monetary Policy

53 Pages Posted: 6 Sep 2009

See all articles by Pierre L. Siklos

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs

Date Written: August 28, 2009

Abstract

The aim of this paper is to rely on a wide variety of forecasts and survey based estimates of inflationary expectations since the early 1990s for a group of 9 economies, 5 of which explicitly target inflation, and ask: To what extent are disagreements over forecasts of inflation driven by movements in relative prices? The empirical evidence leads to the following conclusions. First, there is little doubt that IT has contributed to narrowing the forecast differences vis-a-vis U.S. inflation forecasts. Second, there is some evidence that, at least since 1990, inflation forecasts in the economies considered that deviate too far from U.S. forecasts show signs of converging towards U.S. expectations. Third, examining the mean of the distribution of forecasts potentially omits important insights about what drives inflation expectations. Finally, commodity and asset prices clearly move inflation forecasts although this is a phenomenon of the second half of the sample. Prior to around 1999 relative price effects on expectations are insignificant.

Keywords: inflation expectations, forecasts, inflation targeting, forecast disagreement

JEL Classification: E31, E37, E58, E65

Suggested Citation

Siklos, Pierre L., Relative Price Shocks, Inflation Expectations, and the Role of Monetary Policy (August 28, 2009). Available at SSRN: https://ssrn.com/abstract=1468919 or http://dx.doi.org/10.2139/ssrn.1468919

Pierre L. Siklos (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
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HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

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