Trust, But Verify. De-Anchoring of Inflation Expectations Under Learning and Heterogeneity

Posted: 3 Feb 2017

Date Written: January 25, 2017

Abstract

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

Busetti, Fabio and Delle Monache, Davide and Gerali, Andrea and Locarno, Alberto, Trust, But Verify. De-Anchoring of Inflation Expectations Under Learning and Heterogeneity (January 25, 2017). ECB Working Paper No. 1994, Available at SSRN: https://ssrn.com/abstract=2910904

Fabio Busetti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
39 06 479 23245 (Phone)
39 06 474 7820 (Fax)

Davide Delle Monache

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea Gerali (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alberto Locarno

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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