Shocks to Inflation Expectations

Author/Editor:

Philip Barrett ; Jonathan J. Adams

Publication Date:

April 29, 2022

Electronic Access:

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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

Frequency:

regular

English

Publication Date:

April 29, 2022

ISBN/ISSN:

9798400206313/1018-5941

Stock No:

WPIEA2022072

Pages:

52

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