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Does self-fulfilment of the inflation expectation exist?

Yingying Xu, Zhi-Xin Liu, Hsu-Ling Chang, Adelina Dumitrescu Peculea and Chi-Wei Su

Applied Economics, 2017, vol. 49, issue 11, 1098-1113

Abstract: This study examines the causal relationship between the actual and expected inflation in the U.S., using the bootstrap Granger full-sample causality test and sub-sample rolling-window estimation test to illustrate the self-fulfilment of inflation expectations. The full-sample result indicates that there is a bidirectional causality between the actual and expected inflation, showing the possibility of self-fulfilment of inflation expectations which illustrates that inflation is driven by inflation expectation. However, considering structural changes in two series, we find that the short-run causal nexus between the actual and expected inflation using full-sample data are fraudulent. By adopting a time-varying rolling-window approach to revisiting the dynamic causal relationships, this article identifies that the actual inflation has both positive and negative impacts on the expected inflation in distinct sub-periods. Nevertheless, inflation expectation exerts only negative effects on the actual inflation. The results point out that the self-fulfilment of inflation expectations does not exist. Given the bidirectional nexus between the actual and expected inflation, keeping a low and stable inflation is critical to price stability and anchoring of inflation expectation.

Date: 2017
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