Shocks to Inflation Expectations

Jonathan Adams and Philip Barrett

No 1007, Working Papers from University of Florida, Department of Economics

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: we run a structural VAR, where the expectation shock is the single dimension in the time series that causes forecasts to depart from those implied by rational expectations. We measure these shocks for inflation expectations, label them ``sentiment shocks", and study their effects on the macroeconomy. Using data on several measures of inflation expectations and other time series for the United States, we find that a positive sentiment shock causes output and interest rates to fall, but barely affects inflation. These results are a puzzle, incompatible with the standard New Keynesian model which predicts inflation and interest rates should increase.

JEL-codes: D84 E31 E32 E52 (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
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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Persistent link: https://EconPapers.repec.org/RePEc:ufl:wpaper:001007

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