Working Paper: CEPR ID: DP13900
Authors: Carlos Carvalho; Stefano Eusepi; Emanuel Moench; Bruce Preston
Abstract: 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 Codes: E32; D83; D84
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-run inflation surprises (E31) | long-run inflation expectations (E31) |
| historical forecasting performance (C53) | moderation of short-run inflation surprises and long-run inflation expectations (E31) |
| monetary policy actions (E52) | moderation of short-run inflation surprises and long-run inflation expectations (E31) |
| poorly anchored inflation expectations (E31) | high sensitivity to forecast errors (C53) |
| high sensitivity to forecast errors (C53) | significant adjustments in long-term beliefs about inflation (E31) |
| large and persistent forecast errors (E17) | switch from decreasing-gain to constant-gain forecasting model (C53) |
| short-run inflation dynamics (E31) | long-run inflation expectations (E31) |