REAL-TIME MONITORING OF THE US INFLATION EXPECTATION PROCESS

Vasyl Golosnoy and Jan Roestel

Macroeconomic Dynamics, 2019, vol. 23, issue 6, 2221-2249

Abstract: Real-time supervision of shifts in inflation expectations is an important issue for monetary policy makers, especially in the presence of economic uncertainty. In this paper, we elaborate tools for on-line monitoring of such shifts by extracting valuable information from noisy daily financial market data. For this purpose, first, we suggest a new risk adjustment for observable proxies of medium and long run inflation expectations assuming that the latter are well-anchored. Second, we propose an econometric methodology for sequential monitoring of level changes in the associated proxies at daily frequency. Our empirical evidence shows that the on-line surveillance of risk adjusted US forward breakeven inflation rates by means of the cumulative sum (CUSUM) detector appears to be helpful to extract timely signals on potential shifts. In particular, the obtained signals indicate important turning points in market-based measures of inflation expectations, which also tend to materialize in lower frequency experts' surveys.

Date: 2019
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