DP13900 Anchored Inflation Expectations

Author(s):	Stefano Eusepi, Emanuel Moench, Bruce Preston, Carlos Viana de Carvalho
Publication Date:	July 2019
Date Revised:	April 2021
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

We develop a theory of low-frequency movements in inflation expectations, and use it to interpret joint dynamics of inflation and inflation expectations for the United States and other countries over the post-war period. In our theory long-run inflation expectations are endogenous. They are driven by short-run inflation surprises, in a way that depends on recent forecasting performance and monetary policy. This distinguishes our theory from common explanations of low-frequency properties of inflation. The model, estimated using only inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations and identifies episodes of unanchored expectations.