Expectations' Anchoring and Inflation Persistence

Author/Editor:

Rudolfs Bems ; Francesca G Caselli ; Francesco Grigoli ; Bertrand Gruss ; Weicheng Lian

Publication Date:

December 11, 2018

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Understanding the sources of inflation persistence is crucial for monetary policy. This paper provides an empirical assessment of the influence of inflation expectations' anchoring on the persistence of inflation. We construct a novel index of inflation expectations' anchoring using survey-based inflation forecasts for 45 economies starting in 1989. We then study the response of consumer prices to terms-of-trade shocks for countries with flexible exchange rates. We fi nd that these shocks have a signifi cant and persistent eff ect 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.

Series:

Working Paper No. 18/280

Subject:

English

Publication Date:

December 11, 2018

ISBN/ISSN:

9781484388846/1018-5941

Stock No:

WPIEA2018280

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

31

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