DP16391 Expectations' Anchoring and Inflation Persistence

Author(s): Rudolfs Bems, Francesca Caselli, Francesco Grigoli, Bertrand Gruss
Publication Date: July 2021
Keyword(s): anchoring, credibility, Inflation expectations, Inflation persistence, terms of trade
JEL(s): E31, E52
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16391

Understanding the sources of inflation persistence is crucial for monetary policy. This paper provides an assessment of the influence of inflation expectations' anchoring on the persistence of inflation. We construct an index of inflation expectations' anchoring using survey-based inflation forecasts for 45 economies since 1989. We then study the response of consumer prices to terms-of-trade shocks and find that these shocks have a significant and persistent effect on consumer price inflation when expectations are poorly anchored. By contrast, inflation reacts by less and returns quickly to its pre-shock level when expectations are strongly anchored.