The Effects of Economic Shocks on Heterogeneous Inflation Expectations

By Yoosoon Chang, Fabio Gómez-Rodríguez, Gee Hee Hong

July 1, 2022

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Yoosoon Chang, Fabio Gómez-Rodríguez, and Gee Hee Hong. The Effects of Economic Shocks on Heterogeneous 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

In this paper, we examine how economic shocks affect the distribution of household inflation expectations. We show that the dynamics of households' expected inflation distributions are driven by three distinctive functional shocks, which influence the expected inflation distribution through disagreement, level shift and ambiguity. Linking these functional shocks to economic shocks, we find that contractionary monetary shocks increase the average level of inflation expectation with anchoring effects, with a reduction in disagreement and an increase in the share of households expecting future inflation to be between 2 to 4 percent. Such anchoring effects are not observed when the high inflation periods prior to the Volcker disinflation are included. Expansionary government spending shocks have inflationary effects on both short and medium-run inflation expectations, while an increase in personal income tax shocks is inflationary for mediumrun. A surprise increase in gasoline prices increases the level of inflation expectations, but lowers the share of households with 2 percent inflation expectations.

Subject: Expenditure, Fuel prices, Income shocks, Inflation, National accounts, Personal income tax, Prices, Taxes

Keywords: Expansionary government spending shock, Fuel prices, Functional autoregression, Gasoline price shock, Heterogeneous beliefs, Household survey, Income shocks, Inflation, Inflation distribution, Inflation expectation, Inflation expectations, Monetary policy shock, Personal income tax, Transmission of economic shocks

Publication Details

Pages:

59
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/132
Stock No:

WPIEA2022132
ISBN:

9798400212734
ISSN:

1018-5941

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