Monetary Policy Surprises and Inflation Expectation Dispersion

IMF Working Papers, November 13, 2020

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Anchoring of inflation expectations is of paramount importance for central banks’ ability to deliver stable inflation and minimize price dispersion.
Using daily interest rates and inflation forecasts from major financial institutions in the United States, monetary policy surprises of individual analysts are calculated as the unexpected changes in the federal funds rate before the meetings of the Federal Reserve Board.
Monetary policy surprises lead to an increase in the dispersion of inflation expectations up to nine months after the policy meeting.
The dispersion of inflation expectations is used as a proxy for the extent of anchoring and is based on the same analysts’ inflation projections submitted after the Fed meetings.

Data sources: daily interest rates and inflation forecasts from major financial institutions in the United States.
Identification hinges on a tight window around the Fed meetings to measure unexpected changes in the federal funds rate and subsequent inflation projections.
Unit of observation: individual analysts’ forecasts and surprises tied to Fed meetings.

A partial equilibrium model is used to rationalize empirical results.
Model features rational expectations and sticky information.
When the degree of information rigidity depends on the realization of firm-specific shocks, theoretical results are qualitatively consistent and quantitatively close to the empirical evidence.

Subject: Central bank policy rate, Economic forecasting, Financial institutions, Financial services, Futures, Inflation, Inflation targeting, Monetary policy, Prices
Keywords: Anchoring, Central bank policy rate, disagreement, dispersion, expectation decrease, expectation disagreement, expectation dispersion, Futures, Global, in?ation expectations, Inflation, inflation dispersion, inflation expectation, inflation expectation formation mechanism, inflation expectations, inflation release, Inflation targeting, information rigidity, monetary policy surprise, price level, standard deviation, sticky information, sticky information., WP