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Long memory in inflation expectations: evidence from international expectations

Joseph Gagnon

No 538, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This study provides evidence that 10-year-ahead inflation expectations adapt very slowly to changes in realized inflation. This evidence derives primarily from yields on 10-year government bonds in a sample of OECD countries, including inflation-indexed bonds where they are available. The study examines both the cross-country and time-series behavior of interest rates and inflation rates. For the United States, additional evidence is provided from a survey of 10-year inflation expectations held by market participants. This study does not present a theoretical model of expectations formation. However, long memory of the type documented in this study would be implied by a model of multiple inflationary regimes in which agents base their probability distributions of future regimes on past inflationary experience.

Keywords: Inflation; (Finance) (search for similar items in EconPapers)
Date: 1996
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