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Assessing the (de-)anchoring of households’ long-term inflation expectations in the US

Pradyumna Dash, Abhishek Kumar Rohit and Adviti Devaguptapu

Journal of Macroeconomics, 2020, vol. 63, issue C

Abstract: Well-anchored inflation expectations play an important role in the achievement of price stability. The (de-)anchoring of long-term inflation expectations in the US has been under debate since the sub-prime crisis. This paper assesses and explains the evolution of the degree of (de-)anchorage of households’ long-term inflation expectations in the US during the period of 1990 to 2019, in a time-varying framework. We find the long-term inflation expectations to be de-anchored during the entire study period. The de-anchorage was greater in the first half of the 1990s. Subsequently, it has declined but has not yet anchored. An increase in inflation perception reduces the degree of de-anchorage in a (persistently) low-inflation perception period, whereas it causes a rise in the degree of de-anchorage when inflation perception is around its long-term average or is persistently high. Further, a rise in economic policy uncertainty also increases the de-anchorage of households’ long-term inflation expectations. This suggests that the Federal Reserve System (Fed) may find it beneficial to pay more attention to households’ inflation perception.

Keywords: Inflation expectations; Perceptions of inflation; Monetary policy; Economic policy uncertainty (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jmacro.2019.103183

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