Political Shocks and Inflation Expectations Evidence from the 2022 Russian Invasion of Ukraine

Abstract

How do global political shocks influence macroeconomic expectations? We run a unique survey on inflation expectations among tenured economics professors in Germany and exploit the 2022 Russian invasion of Ukraine as a natural experiment to identify the effect of a global political shock on inflation expectations. We find sizable effects on inflation expectations and monetary policy recommendations. A comparison with a representative sample of households shows that experts’ expectations adjust faster and to a larger degree. Text analyses on open-ended questions reveal that the effects are caused by supply-side models underlying experts’ formation of expectations.

Keywords: Inflation expectations, belief formation, natural experiment, 2022