DP13900 Anchored Inflation Expectations

Author(s): Stefano Eusepi, Emanuel Moench, Bruce Preston, Carlos Viana de Carvalho
Publication Date: July 2019
Date Revised: July 2019
Keyword(s): Anchored expectations, Inflation expectations, survey data
JEL(s): D83, D84, E32
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13900

Because of policy uncertainty long-run inflation beliefs are a state-contingent function of short-run inflation surprises. Expectations are well anchored only when the central bank is credible and long-run beliefs display small and declining sensitivity to short-run forecast errors. Nominal rigidities mean shifts in beliefs induce an endogenous inflation trend, with time-varying persistence and volatility. This feature of our theory of the nominal anchor distinguishes it from common explanations of low-frequency movements in inflation. The model, estimated using only US inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations for the US and other countries, including several episodes of poorly anchored expectations.