Fitting observed inflation expectations

Marco Del Negro and Stefano Eusepi

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 12, 2105-2131

Abstract: The paper provides evidence on the extent to which inflation expectations generated by a standard Christiano et al. (2005)/Smets and Wouters (2003)-type DSGE model are in line with what observed in the data. We consider three variants of this model that differ in terms of the behavior of, and the public's information on, the central banks' inflation target, allegedly a key determinant of inflation expectations. We find that (i) time-variation in the inflation target is needed to capture the evolution of expectations during the post-Volcker period; (ii) the variant where agents have Imperfect Information is strongly rejected by the data; (iii) inflation expectations appear to contain information that is not present in the other series used in estimation, and (iv) none of the models fully capture the dynamics of this variable.

Keywords: Inflation expectations; Imperfect Information; Bayesian analysis; DSGE models (search for similar items in EconPapers)
JEL-codes: C32 E3 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (101)

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Working Paper: Fitting observed inflation expectations (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:12:p:2105-2131

DOI: 10.1016/j.jedc.2011.04.005

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