Hostname: page-component-76fb5796d-x4r87 Total loading time: 0 Render date: 2024-04-26T15:25:13.832Z Has data issue: false hasContentIssue false
  • English
  • Français

THE ANCHORING OF INFLATION EXPECTATIONS IN THE SHORT AND IN THE LONG RUN

Published online by Cambridge University Press:  21 September 2017

Dieter Nautz ,
Till Strohsal  and
Aleksei Netšunajev
Dieter Nautz*
Affiliation:
Freie Universität Berlin
Till Strohsal
Affiliation:
Freie Universität Berlin
Aleksei Netšunajev
Affiliation:
Bank of Estonia, Tallinn University of Technology
*
Address correspondence to: Dieter Nautz, Department of Economics, Freie Universität Berlin, Boltzmannstr. 20, 14195 Berlin, Germany; e-mail: dieter.nautz@fu-berlin.de.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper introduces structural VAR analysis as a tool for investigating the anchoring of inflation expectations. We show that US consumers' inflation expectations are anchored in the long run because macro-news shocks are long-run neutral for long-term inflation expectations. The identification of structural shocks helps to explain why inflation expectations deviate from the central bank's target. Our results indicate that the recent decline in long-term inflation expectations does not result from deanchoring macro-news but can be attributed to downward adjustments in consumers' expectations about the central bank's inflation target.

Keywords

Inflation ExpectationsStructural VARMarkov-Switching Heteroscedasticity
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 5 , July 2019 , pp. 1959 - 1977
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Financial support from the Deutsche Forschungsgemeinschaft (DFG) through CRC 649 “Economic Risk” is gratefully acknowledged. We are grateful for comments by Sven Schreiber, Mathias Trabandt, and Lars Winkelmann. The views expressed are those of the author(s) and do not necessarily represent the official views of Eesti Pank or the Eurosystem.

References

REFERENCES

Autrup, S. L. and Grothe, M. (2014) Economic Surprises and Inflation Expectations: Has Anchoring of Expectations Survived the Crisis? European Central Bank working paper series 1671.Google Scholar
Bauer, M. D. (2015) Inflation expectations and the news. International Journal of Central Banking 11 (2), 1–40.Google Scholar
Beechey, M. J., Johannsen, B. K., and Levin, A. T. (2011) Are long-run inflation expectations anchored more firmly in the Euro area than in the United States? American Economic Journal: Macroeconomics 3 (2), 104–129.Google Scholar
Blanchard, O. and Quah, D. (1989) The dynamic effects of aggregate demand and supply disturbances. American Economic Review 79, 655–673.Google Scholar
Bomfim, A. N. and Rudebusch, G. D. (2000) Opportunistic and deliberate disinflation under imperfect credibility. Journal of Money, Credit and Banking 32 (4), 707–721.Google Scholar
Burbidge, J. and Harrison, A. (1985) An historical decomposition of the great depression to determine the role of money. Journal of Monetary Economics 16 (1), 45–54.Google Scholar
Chen, W. and Netšunajev, A. (2016) On the long-run neutrality of demand shocks. Economics Letters 139, 57–60.Google Scholar
Clarida, R., Gali, J., and Gertler, M. (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115 (1), 147.Google Scholar
Clark, T. E. and Davig, T. (2011) Decomposing the declining volatility of long-term inflation expectations. Journal of Economic Dynamics and Control 35 (7), 981–999.Google Scholar
Del Negro, M., Giannoni, M. P., and Schorfheide, F. (2015) Inflation in the great recession and new keynesian models. American Economic Journal: Macroeconomics 7, 168–196.Google Scholar
Demertzis, M., Marcellino, M., and Viegi, N. (2012) A credibility proxy: Tracking US monetary developments. The B.E. Journal of Macroeconomics 12 (1). Retrieved 31 May 2017, from doi:10.1515/1935-1690.2442.Google Scholar
Dovern, J. (2015) A multivariate analysis of forecast disagreement: Confronting models of disagreement with survey data. European Economic Review 80, 16–35.Google Scholar
Dovern, J., Fritsche, U., and Slacalek, J. (2012) Disagreement among forecasters in G7 countries. Review of Economics and Statistics 94 (4), 1081–1096.Google Scholar
Easaw, J., Golinelli, R., and Malgarini, M. (2013) What determines households inflation expectations? Theory and evidence from a household survey. European Economic Review 61, 1–13.Google Scholar
Ehrmann, M. (2015) Targeting inflation from below: How do inflation expectations behave? International Journal of Central Banking 11 (4), 213–249.Google Scholar
Ehrmann, M., Fratzscher, M., Gürkaynak, R. S., and Swanson, E. T. (2011) Convergence and anchoring of yield curves in the euro area. The Review of Economics and Statistics 93 (1), 350–364.Google Scholar
Elliott, G., Rothenberg, T. J., and Stock, J. H. (1996) Efficient tests for an autoregressive unit root. Econometrica: Journal of the Econometric Society 64 (4), 813–836.Google Scholar
Galati, G., Poelhekke, S., and Zhou, C. (2011) Did the crisis affect inflation expectations? International Journal of Central Banking 7 (1), 167–207.Google Scholar
Gürkaynak, R. S., Levin, A., and Swanson, E. (2010) Does inflation targeting anchor long-run inflation expectations? Evidence from the U.S., UK, and Sweden. Journal of the European Economic Association 8 (6), 1208–1242.Google Scholar
Herwartz, H. and Lütkepohl, H. (2014) Structural vector autoregressions with Markov switching: Combining conventional with statistical identification of shocks. Journal of Econometrics 183 (1), 104–116.Google Scholar
Jochmann, M., Koop, G., and Potter, S. M. (2010) Modeling the dynamics of inflation compensation. Journal of Empirical Finance 17 (1), 157–167.Google Scholar
Kwiatkowski, D., Phillips, P. C., Schmidt, P., and Shin, Y. (1992) Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics 54 (1), 159–178.Google Scholar
Lanne, M., Lütkepohl, H., and Maciejowska, K. (2010) Structural vector autoregressions with markov switching. Journal of Economic Dynamics and Control 34 (2), 121–131.Google Scholar
Leduc, S., Sill, K., and Stark, T. (2007) Self-fulfilling expectations and the inflation of the 1970s: Evidence from the livingston survey. Journal of Monetary Economics 54 (2), 433–459.Google Scholar
Lütkepohl, H. and Netšunajev, A. (2014) Disentangling demand and supply shocks in the crude oil market: How to check sign restrictions in structural vars. Journal of Applied Econometrics 29 (3), 479–496.Google Scholar
Moessner, R. (2013) Effects of explicit FOMC policy rate forward guidance on interest rate expectations. Economics Letters 121 (2), 170–173.Google Scholar
Moessner, R. (2015) Reactions of us government bond yields to explicit FOMC forward guidance. North American Journal of Economics and Finance 33, 217–233.Google Scholar
Nagel, S. (2016) Long-run inflation uncertainty. International Journal of Central Banking 12 (3), 207–217.Google Scholar
Nautz, D., Pagenhardt, L., and Strohsal, T. (2017) The (de-) anchoring of inflation expectations: New evidence from the euro area. The North American Journal of Economics and Finance 40C, 103–115.Google Scholar
Nautz, D. and Strohsal, T. (2015) Are US inflation expectations re-anchored? Economics Letters 127, 6–9.Google Scholar
Netšunajev, A. and Winkelmann, L. (2016) International Dynamics of Inflation Expectations. SFB 649 discussion paper 2016-019.Google Scholar
Perron, P. (2006) Dealing with structural breaks. In Mills, T. C. and Patterson, K. (eds.), Palgrave Handbook of Econometrics, vol. 1: Econometric Theory, pp. 278–352. Basingstoke, UK: Palgrave Macmillan.Google Scholar
Rigobon, R. (2003) Identification through heteroskedasticity. The Review of Economics and Statistics 85 (4), 777–792.Google Scholar
Rudebusch, G. D. (2001) Is the fed too timid? Monetary policy in an uncertain world. Review of Economics and Statistics 83 (2), 203–217.Google Scholar
Schmidt, S. and Nautz, D. (2012) Central bank communication and the perception of monetary policy by financial market experts. Journal of Money, Credit and Banking 44 (2–3), 323–340.Google Scholar
Strohsal, T., Melnick, R., and Nautz, D. (2016) The time-varying degree of inflation expectations anchoring. Journal of Macroeconomics 48, 62–71.Google Scholar
Strohsal, T. and Winkelmann, L. (2015) Assessing the anchoring of inflation expectations. Journal of International Money and Finance 50, 33–48.Google Scholar
Yellen, J. L. (2015) Inflation Dynamics and Monetary Policy. Speech at the Philip Gamble Memorial Lecture, University of Massachusetts, Amherst, Massachusetts, 2015-09-24.Google Scholar