Trust, But Verify. De-Anchoring of Inflation Expectations Under Learning and Heterogeneity
Posted: 3 Feb 2017
Date Written: January 25, 2017
The paper studies how a prolonged period of subdued price developments may induce a de-anchoring of inﬂation expectations from the central bank’s objective. This is shown within a framework where agents form expectations using adaptive learning, choosing among a set of alternative forecasting models. The analysis is accompanied by empirical evidence on the properties of inﬂation expectations in the euro area. Our results also suggest that monetary policy may lose eﬀectiveness if delayed too much, as expectations are allowed to drift away from target for too long.
Keywords: Learning, DSGE, Expectations de-anchoring, Inﬂation
JEL Classification: E31, E37, E58, D83
Suggested Citation: Suggested Citation