Anchored Inflation Expectations
73 Pages Posted: 15 Aug 2017 Last revised: 16 Aug 2017
Date Written: August 15, 2017
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: Suggested Citation