Expectations' Anchoring and Inflation Persistence

Rudolfs Bems, Francesca Caselli, Francesco Grigoli () and Bertrand Gruss

No 16391, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Understanding the sources of inflation persistence is crucial for monetary policy. This paper provides an assessment of the influence of inflation expectations' anchoring on the persistence of inflation. We construct an index of inflation expectations' anchoring using survey-based inflation forecasts for 45 economies since 1989. We then study the response of consumer prices to terms-of-trade shocks and find that these shocks have a significant and persistent effect on consumer price inflation when expectations are poorly anchored. By contrast, inflation reacts by less and returns quickly to its pre-shock level when expectations are strongly anchored.

Keywords: Anchoring; Credibility; Inflation expectations; Inflation persistence; Terms of trade (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2021-07
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Related works:
Journal Article: Expectations' anchoring and inflation persistence (2021)
Working Paper: Expectations' Anchoring and Inflation Persistence (2018)
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