Relative Price Shocks, Inflation Expectations, and the Role of Monetary Policy
53 Pages Posted: 6 Sep 2009
Date Written: August 28, 2009
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: Suggested Citation