Monetary Policy Surprises and Inflation Expectation Dispersion

Author/Editor:

Bertrand Gruss ; Sandra Lizarazo ; Francesco Grigoli

Publication Date:

November 13, 2020

Electronic Access:

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Summary:

Anchoring of inflation expectations is of paramount importance for central banks’ ability to deliver stable inflation and minimize price dispersion. Relying on daily interest rates and inflation forecasts from major financial institutions in the United States, we calculate monetary policy surprises of individual analysts as the unexpected changes in the federal funds rate before the meetings of the Federal Reserve Board. We then assess the effect of monetary policy surprises on the dispersion of inflation expectations, a proxy for the extent of anchoring, which is based on the same analysts’ inflation projections submit-ted after the Fed meetings. With an identification strategy that hinges on a tight window around the Fed meetings, we find that monetary policy surprises lead to an increase in the dispersion of inflation expectations up to nine months after the policy meeting. We rationalize these results with a partial equilibrium model that features rational expectations and sticky information. When we allow the degree of information rigidity to depend on the realization of firm-specific shocks, the theoretical results are qualitatively consistent and quantitatively close to the empirical evidence.

Series:

Working Paper No. 2020/252

Frequency:

regular

English

Publication Date:

November 13, 2020

ISBN/ISSN:

9781513559650/1018-5941

Stock No:

WPIEA2020252

Format:

Paper

Pages:

38

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