Anchored Inflation Expectations
67 Pages Posted: 15 Aug 2017 Last revised: 30 Mar 2020
Date Written: March 21, 2020
We develop a theory of low-frequency movements in inflation expectations, and use it to interpret joint dynamics of inflation and inflation expectations for the United States and other countries over the post-war period. In our theory long-run inflation expectations are endogenous. They are driven by short-run inflation surprises, in a way that depends on recent forecasting performance and monetary policy. This distinguishes our theory from common explanations of low-frequency properties of inflation. The model, estimated using only inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations and identifies episodes of unanchored expectations.
Keywords: Anchored expectations, inflation expectations, survey data
JEL Classification: E32, D83, D84
Suggested Citation: Suggested Citation