Shocks to Inflation Expectations
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
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:
The consensus among central bankers is that higher inflation expectations can drive up inflation today, requiring tighter policy. We assess this by devising a novel method for identifying shocks to inflation expectations, estimating a semi-structural VAR where an expectation shock is identified as that which causes measured expectations to diverge from rationality. Using data for the United States, we find that a positive inflation expectations shock is deflationary and contractionary: inflation, output, and interest rates all fall. These results are inconsistent with the standard New Keynesian model, which predicts inflation and interest rate hikes. We discuss possible resolutions to this new puzzle.
Series:
Working Paper No. 2022/072
Subject:
Econometric analysis Economic theory Inflation Machine learning Neoclassical theory Prices Rational expectations Technology Vector autoregression
Frequency:
regular
English
Publication Date:
April 29, 2022
ISBN/ISSN:
9798400206313/1018-5941
Stock No:
WPIEA2022072
Pages:
52
Please address any questions about this title to publications@imf.org