Shocks to Inflation Expectations

Jonathan Adams and Philip Barrett

Review of Economic Dynamics, 2024, vol. 54

Abstract: The consensus among central bankers is that higher inflation expectations can drive up actual inflation. We assess this by devising a novel method for identifying shocks to inflation expectations, estimating a semi-structural VAR where an expectation shock is identified as that which causes measured forecasts to diverge from the rational expectation. Surprisingly, using data for the United States we find that a positive inflation expectation shock is contractionary and deflationary: output, inflation, and interest rates all fall. These results are inconsistent with the standard New Keynesian model, which predicts inflation and interest rate hikes. (Copyright: Elsevier)

Keywords: Inflation; Sentiments; Expectations; Monetary policy (search for similar items in EconPapers)
JEL-codes: D84 E31 E32 E52 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.red.2024.101234

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