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Has inflation targeting anchored inflation expectations? Evidence from Peru

Miguel Saldarriaga, Pablo del Aguila and Kevin Gershy-Damet
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Pablo del Aguila: Central Reserve Bank of Peru
Kevin Gershy-Damet: Central Reserve Bank of Peru

No 2017-103, Working Papers from Peruvian Economic Association

Abstract: Inflation expectations play a key role in inflation dynamics and monetary policy effectiveness. Thus, anchoring inflation expectations have become paramount for Central Banks across the world, mainly for inflation-targeting Central Banks. Yet, the evidence that inflation targeting has anchored inflation expectations in all inflation targeting economies is mixed. Although inflation volatility declined after the inflation-targeting regime came into force in most countries, inflation expectations may still be not anchored, and might just exhibit lower dispersion. The Central Bank of Peru conducts a monthly survey among 350 representative firms from the non-financial sector and 45 professional forecasters since 2002. Following Kumar et al. (2015) we evaluate how anchored inflation expectations in Peru are using four measures: (i) closeness to the Central Bank inflation target, (ii) dispersion across agents, (iii) forecast revisions, and (iv) co-movement between long-run inflation expectations and short-run inflation expectations. Although inflation expectations seem to be somehow anchored to the upper limit of the target band, they do not achieve some of the basic properties required under weaker definitions of anchored expectations. This ‘imperfect anchoring’ may seem precarious as any shock can move away inflation expectations from the Central Bank target and can limit monetary policy success.

Date: 2017-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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