Fitting observed inflation expectations

Marco Del Negro and Stefano Eusepi

No 476, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper provides evidence on the extent to which inflation expectations generated by a standard Christiano et al. (2005)/Smets and Wouters (2003)?type DSGE model are in line with what is observed in the data. We consider three variants of this model that differ in terms of the behavior of, and the public?s information on, the central banks? inflation target, allegedly a key determinant of inflation expectations. We find that: 1) time-variation in the inflation target is needed to capture the evolution of expectations during the post-Volcker period; 2) the variant where agents have imperfect information is strongly rejected by the data; 3) inflation expectations appear to contain information that is not present in the other series used in estimation; and 4) none of the models fully captures the dynamics of this variable.

Keywords: Bayesian analysis; DSGE models; inflation expectations; imperfect information (search for similar items in EconPapers)
JEL-codes: C32 E21 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2010-11-01
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
Note: For a published version of this report, see Marco Del Negro and Stefano Eusepi, "Fitting Observed Inflation Expectations," Journal of Economic Dynamics and Control 35, no. 12 (December 2011): 2105-31.
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Citations: View citations in EconPapers (6)

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