Anchored Inflation Expectations

73 Pages Posted: 15 Aug 2017 Last revised: 16 Aug 2017

See all articles by Carlos Carvalho

Carlos Carvalho

Government of the Federative Republic of Brazil - Central Bank of Brazil; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Stefano Eusepi

University of Texas at Austin

Emanuel Moench

Deutsche Bundesbank

Bruce Preston

The University of Melbourne

Date Written: August 15, 2017

Abstract

This paper proposes a model of inflation where changes in long-run inflation beliefs are a state-contingent function of short-run inflation surprises. Expectations are well anchored only when long-run beliefs display small and declining sensitivity to short-run forecast errors. Because of nominal rigidities, shifts in beliefs induce an endogenous inflation trend, in contrast to common specifications of low-frequency movements in inflation. The model, estimated using only US inflation and short-term forecasts from professional surveys, provides an accurate account of the behavior of observed measures of long-term inflation expectations for the US and other countries, including several episodes of unanchored expectations.

Keywords: Anchored expectations, inflation expectations, survey data

JEL Classification: E32, D83, D84

Suggested Citation

Carvalho, Carlos and Eusepi, Stefano and Moench, Emanuel and Preston, Bruce, Anchored Inflation Expectations (August 15, 2017). Available at SSRN: https://ssrn.com/abstract=3018198 or http://dx.doi.org/10.2139/ssrn.3018198

Carlos Carvalho

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

Stefano Eusepi (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Emanuel Moench

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+49 69 95662312 (Phone)

Bruce Preston

The University of Melbourne ( email )

185 Pelham Street
Carlton, 3053
Australia

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