Shocks to Inflation Expectations
Author | : Mr. Philip Barrett |
Publisher | : International Monetary Fund |
Total Pages | : 52 |
Release | : 2022-04-29 |
ISBN-10 | : 9798400206313 |
ISBN-13 | : |
Rating | : 4/5 (13 Downloads) |
Download or read book Shocks to Inflation Expectations written by Mr. Philip Barrett and published by International Monetary Fund. This book was released on 2022-04-29 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.