Targeting inflation expectations?

Mridula Duggal
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Mridula Duggal: Bank of England

No 1175, Bank of England Staff Working Paper series from Bank of England

Abstract: This paper studies how inflation expectations respond to monetary-policy regime changes. I develop a New Keynesian model with trend inflation and adaptive learning in which adopting inflation targeting (IT) is a downward shift in the central bank’s inflation objective. Under rational expectations, expected inflation adjusts on impact. Under adaptive learning, beliefs update gradually and expectations adjust only partially between announcement and implementation. I then use professional-forecaster surveys for 32 countries and exploit staggered IT adoption to trace expectations and realised inflation around regime transitions. Empirically, inflation declines following adoption, while survey expectations exhibit little systematic adjustment. The results indicate that inflation leads expectations, at odds with the canonical New Keynesian rational-expectations prediction, and imply that – following the adoption of IT – credibility can be built over time as policy delivers lower inflation outcomes.

Keywords: Inflation expectations; monetary policy; subjective expectations; adaptive learning; inflation; regime shifts (search for similar items in EconPapers)
JEL-codes: D83 D84 E52 E58 (search for similar items in EconPapers)
Pages: 68
Date: 2026-03-20
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023297

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