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Actual and Expected Inflation in the U.S.: A Time-Frequency View

Yingying Xu, Zhixin Liu and Jaime Ortiz ()
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Yingying Xu: School of Economics and Management, University of Scince and Technology Beijing, Beijing, P.R. China.
Zhixin Liu: School of Economics and Management, Beihang University, Beijing, P.R. China.
Jaime Ortiz: Vice Provost Global Strategies and Studies, University of Houston, Houston, TX, United States.

Journal for Economic Forecasting, 2018, issue 1, 42-62

Abstract: This study examines the correlation between actual and expected inflation in the United States to test whether inflation expectations become self-fulfilling. Wavelet coherence analysis shows that the lead-lag linkage between actual and expected inflation varies according to factors of both frequency and time. The relationship between actual and expected inflation is more robust for frequencies longer than four years than short to medium term ones. We find leading effects of actual inflation on inflation expectations in most periods over medium and low frequencies. However, the structural changes that occurred in 2011 appear to have weakened this effect and no leading role of inflation expectations is found. Therefore, self-fulfilling inflation expectations and the “inflation-expectation” spiral do not appear to pose threats for the U.S. economy.

Keywords: inflation; expectation; self-fulfillment; wavelet analysis; time domain; frequency domain (search for similar items in EconPapers)
JEL-codes: C32 E31 D84 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:rjr:romjef:v::y:2018:i:1:p:42-62