Monetary Policy Surprises and Inflation Expectation Dispersion

Bertrand Gruss, Sandra Lizarazo and Francesco Grigoli ()

No 2020/252, IMF Working Papers from International Monetary Fund

Abstract: Anchoring of inflation expectations is of paramount importance for central banks’ ability to deliver stable inflation and minimize price dispersion. Relying on daily interest rates and inflation forecasts from major financial institutions in the United States, we calculate monetary policy surprises of individual analysts as the unexpected changes in the federal funds rate before the meetings of the Federal Reserve Board. We then assess the effect of monetary policy surprises on the dispersion of inflation expectations, a proxy for the extent of anchoring, which is based on the same analysts’ inflation projections submit-ted after the Fed meetings. With an identification strategy that hinges on a tight window around the Fed meetings, we find that monetary policy surprises lead to an increase in the dispersion of inflation expectations up to nine months after the policy meeting. We rationalize these results with a partial equilibrium model that features rational expectations and sticky information. When we allow the degree of information rigidity to depend on the realization of firm-specific shocks, the theoretical results are qualitatively consistent and quantitatively close to the empirical evidence.

Keywords: Anchoring; disagreement; dispersion; information rigidity; in?ation expectations; sticky information.; WP; inflation expectation; expectation dispersion; monetary policy surprise; price level; inflation dispersion; inflation expectation formation mechanism; inflation expectations; sticky information; expectation decrease; expectation disagreement; inflation release; standard deviation; Inflation; Inflation targeting; Central bank policy rate; Futures; Global (search for similar items in EconPapers)
Pages: 38
Date: 2020-11-13
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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