Do inflation expectations respond to monetary policy? An empirical analysis for the United Kingdom

Natalie Burr ()
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Natalie Burr: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1109, Bank of England working papers from Bank of England

Abstract: This paper studies how monetary policy impacts inflation expectations in the United Kingdom. Using higher moments of the distribution of inflation expectations, I construct a summary measure of expectations for households, firms, professional forecasters and financial markets. In a Bayesian VAR identified using a high frequency-identified monetary policy shock series, I find that a monetary policy tightening causes significant variation in the response of inflation expectations across groups: firms’ and financial market median expectations fall, while households’ inflation expectations rise. I document that monetary policy decisions act as a stabilisation mechanism by reducing the dispersion of expectations 12–18 months following a shock.

Keywords: Inflation expectations; monetary policy transmission; structural VAR (search for similar items in EconPapers)
JEL-codes: C38 E31 E52 E58 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2025-01-10
New Economics Papers: this item is included in nep-cba and nep-mon
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