## Shocks to Inflation Expectations

_IMF Working Papers, April 29, 2022_

## Source details

**Canonical URL:** [Shocks to Inflation Expectations](https://www.imf.org/en/publications/wp/issues/2022/04/29/shocks-to-inflation-expectations-517437)

## Other formats

- [Markdown version](/en/publications/wp/issues/2022/04/29/shocks-to-inflation-expectations-517437/index.md)
- [Structured JSON version](/en/publications/wp/issues/2022/04/29/shocks-to-inflation-expectations-517437/index.json)
- [Bundle manifest](/en/publications/wp/issues/2022/04/29/shocks-to-inflation-expectations-517437/bundle-manifest.json)

## Bibliographic details
- Authors: Philip Barrett, Jonathan J. Adams
- Published: April 29, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400206313.001

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### Summary and Research Question
- The consensus among central bankers is that higher inflation expectations can drive up inflation today, requiring tighter policy.
- The paper devises a novel method for identifying shocks to inflation expectations.
- It estimates 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, the authors find results that are inconsistent with the standard New Keynesian model.
- The paper discusses possible resolutions to this new puzzle.

### Methodology
- Novel identification method: an expectation shock is defined as the shock that causes measured expectations to diverge from rationality.
- Empirical framework: semi-structural vector autoregression (VAR).
- Data: United States (specific series and sample not reproduced on the landing page).

### Key Findings and Results
- A positive inflation expectations shock is:
  - Deflationary: inflation falls.
  - Contractionary: output falls.
  - Associated with lower interest rates: interest rates fall.
- These empirical results contrast with the prediction of the standard New Keynesian model, which predicts inflation and interest rate hikes following higher inflation expectations.

### Interpretation and Discussion
- The findings create a new puzzle for macroeconomic theory because they contradict standard New Keynesian predictions.
- The authors discuss possible resolutions to this puzzle (specific resolutions are discussed in the full paper).

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2022/04/29/shocks-to-inflation-expectations-517437_