Shocks to Inflation Expectations

April 29, 2022

Preview Citation

Format: Chicago

Philip Barrett, and Jonathan J. Adams Shocks to Inflation Expectations, (USA: International Monetary Fund, 2022) accessed November 8, 2024

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.

Subject: Econometric analysis, Economic theory, Inflation, Machine learning, Neoclassical theory, Prices, Rational expectations, Technology, Vector autoregression

Keywords: Expectations, Expectations multiplier, Forecasted inflation, Inflation, Inflation, Inflation expectation, Inflation impulse, Interest rate hike, Machine learning, Monetary Policy, Neoclassical theory, Rational expectations, Sentiment shock, Sentiments, Vector autoregression

Publication Details

Pages:

52
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/072
Stock No:

WPIEA2022072
ISBN:

9798400206313
ISSN:

1018-5941

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