Shocks to Inflation Expectations

Philip Barrett and Jonathan Adams

No 2022/072, IMF Working Papers from International Monetary Fund

Abstract: The consensus among central bankers is that higher inflation expectations can drive up inflation today, requiring tighter policy. We assess this by devising a novel method for identifying shocks to inflation expectations, estimating a semi-structural VAR where an expectation shock is identified as that which causes measured expectations to diverge from rationality. Using data for the United States, we find that a positive inflation expectations shock is deflationary and contractionary: inflation, output, and interest rates all fall. These results are inconsistent with the standard New Keynesian model, which predicts inflation and interest rate hikes. We discuss possible resolutions to this new puzzle.

Keywords: Inflation; Sentiments; Expectations; Monetary Policy; inflation expectation; interest rate hike; sentiment shock; forecasted inflation; expectations multiplier; inflation impulse; Inflation; Neoclassical theory; Rational expectations; Vector autoregression; Machine learning (search for similar items in EconPapers)
Pages: 52
Date: 2022-04-29
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Journal Article: Shocks to Inflation Expectations (2024)
Working Paper: Shocks to Inflation Expectations (2022)
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