Expectations' Anchoring and Inflation Persistence

Rudolfs Bems, Francesca Caselli, Francesco Grigoli (), Bertrand Gruss and Weicheng Lian

No 2018/280, IMF Working Papers from International Monetary Fund

Abstract: Understanding the sources of inflation persistence is crucial for monetary policy. This paper provides an empirical assessment of the influence of inflation expectations' anchoring on the persistence of inflation. We construct a novel index of inflation expectations' anchoring using survey-based inflation forecasts for 45 economies starting in 1989. We then study the response of consumer prices to terms-of-trade shocks for countries with flexible exchange rates. We find that these shocks have a significant and persistent effect on consumer price inflation when expectations are poorly anchored. By contrast, inflation reacts by less and returns quickly to its pre-shock level when expectations are strongly anchored.

Keywords: WP; inflation expectation; terms of trade; exchange rate; Anchoring; credibility; inflation expectations; inflation persistence; terms-of-trade shock; commodity terms of trade index; inflation performance; inflation surprise; consumer price inflation; commodity terms-of-trade shock; inflation dynamics; Inflation; Consumer prices; Exchange rate arrangements; Commodity prices; Inflation targeting (search for similar items in EconPapers)
Pages: 31
Date: 2018-12-11
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Expectations' anchoring and inflation persistence (2021)
Working Paper: Expectations' Anchoring and Inflation Persistence (2021)
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