Inflation Expectations as a Policy Tool?
Saten Kumar and
No 24788, NBER Working Papers from National Bureau of Economic Research, Inc
We assess whether central banks may use inflation expectations as a policy tool for stabilization purposes. We review recent work on how expectations of agents are formed and how they affect their economic decisions. Empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear, especially for firms. Two additional limitations prevent policy-makers from being able to actively manage inflation expectations. First, available surveys of firms’ expectations are systematically deficient, which can only be addressed through the creation of large, nationally representative surveys of firms. Second, neither households’ nor firms’ expectations respond much to monetary policy announcements in low-inflation environments. We provide suggestions for how monetary policy-makers can pierce this veil of inattention through new communication strategies. At this stage, there remain a number of implementation issues and open research questions that need to be addressed to enable central banks to use inflation expectations as a policy tool.
JEL-codes: C83 D84 E31 (search for similar items in EconPapers)
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Published as Inflation Expectations as a Policy Tool? , Olivier Coibion, Yuriy Gorodnichenko, Saten Kumar, Mathieu Pedemonte. in NBER International Seminar on Macroeconomics 2019 , Forbes and Gourinchas. 2020
Published as Olivier Coibion & Yuriy Gorodnichenko & Saten Kumar & Mathieu Pedemonte, 2020. "Inflation expectations as a policy tool?," Journal of International Economics, .
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