Anchored Inflation Expectations
58 Pages Posted: 15 Aug 2017 Last revised: 28 Feb 2019
Date Written: February 15, 2019
Because of policy uncertainty long-run inflation beliefs are a state-contingent function of short-run inflation surprises. Expectations are well anchored only when the central bank is credible and long-run beliefs display small and declining sensitivity to short-run forecast errors. Nominal rigidities mean shifts in beliefs induce an endogenous inflation trend, with time-varying persistence and volatility. This feature of our theory of the nominal anchor distinguishes it from common explanations of low-frequency movements in inflation. The model, estimated using only US inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations for the US and other countries, including several episodes of poorly anchored expectations.
Keywords: Anchored expectations, inflation expectations, survey data
JEL Classification: E32, D83, D84
Suggested Citation: Suggested Citation