Working Paper: CEPR ID: DP16391
Authors: Rudolfs Bems; Francesca Caselli; Francesco Grigoli; Bertrand Gruss
Abstract: Understanding the sources of inflation persistence is crucial for monetary policy. This paper provides an assessment of the influence of inflation expectations' anchoring on the persistence of inflation. We construct an index of inflation expectations' anchoring using survey-based inflation forecasts for 45 economies since 1989. We then study the response of consumer prices to terms-of-trade shocks and find that these shocks have a significant and persistent effect on consumer price inflation when expectations are poorly anchored. By contrast, inflation reacts by less and returns quickly to its pre-shock level when expectations are strongly anchored.
Keywords: anchoring; credibility; inflation expectations; inflation persistence; terms of trade
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation expectations anchoring (E31) | Consumer price inflation (E31) |
| Negative terms-of-trade shocks (F14) | Consumer price inflation (E31) |
| Poorly anchored inflation expectations (E31) | Persistence of inflation rates (E31) |
| Strongly anchored inflation expectations (E31) | Consumer price inflation (E31) |
| Inflation expectations anchoring (E31) | Inflation dynamics (E31) |