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Balance of Risks and the Anchoring of Consumer Expectations

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  • Jane M. Ryngaert

    (Department of Economics, University of Notre Dame, Notre Dame, IN 46556, USA)

Abstract

This paper shows that expected inflation risks pose threats to the anchoring of expectations. I propose a new method for fitting subjective probability distributions to density forecasts that allows for asymmetric beliefs over inflation outcomes. Using data from the Federal Reserve Bank of New York’s Survey of Consumer Expectations, I show that medium run expectations move in the direction of perceived short run risks. A diffusion index of consumers’ perceived balance of risks to inflation shows that high short run inflation expectations coincide with the balance of medium risks being weighted to the upside.

Suggested Citation

  • Jane M. Ryngaert, 2023. "Balance of Risks and the Anchoring of Consumer Expectations," JRFM, MDPI, vol. 16(2), pages 1-18, January.
    • Handle: RePEc:gam:jjrfmx:v:16:y:2023:i:2:p:79-:d:1049476
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    References listed on IDEAS

    as
    1. Carola Binder, 2020. "Coronavirus Fears and Macroeconomic Expectations," The Review of Economics and Statistics, MIT Press, vol. 102(4), pages 721-730, October.
    2. Andrade, Philippe & Fourel, Valère & Ghysels, Eric & Idier, Julien, 2014. "The financial content of inflation risks in the euro area," International Journal of Forecasting, Elsevier, vol. 30(3), pages 648-659.
    3. Andrade, P. & Ghysels, E. & Idier, J., 2012. "Tails of Inflation Forecasts and Tales of Monetary Policy," Working papers 407, Banque de France.
    4. Emmanuel Apergis & Nicholas Apergis, 2021. "Inflation expectations, volatility and Covid-19: evidence from the US inflation swap rates," Applied Economics Letters, Taylor & Francis Journals, vol. 28(15), pages 1327-1331, September.
    5. Adams, Patrick A. & Adrian, Tobias & Boyarchenko, Nina & Giannone, Domenico, 2021. "Forecasting macroeconomic risks," International Journal of Forecasting, Elsevier, vol. 37(3), pages 1173-1191.
    6. Filippo Natoli & Laura Sigalotti, 2018. "Tail Co-movement in Inflation Expectations as an Indicator of Anchoring," International Journal of Central Banking, International Journal of Central Banking, vol. 14(1), pages 35-71, January.
    7. Ricardo Reis, 2021. "Losing the Inflation Anchors," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 52(2 (Fall)), pages 307-379.
    8. Garcí­a, Juan Angel & Manzanares, Andrés, 2007. "What can probability forecasts tell us about inflation risks?," Working Paper Series 825, European Central Bank.
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    Cited by:

    1. Binder, Carola Conces & Campbell, Jeffrey R. & Ryngaert, Jane M., 2024. "Consumer inflation expectations: Daily dynamics," Journal of Monetary Economics, Elsevier, vol. 145(S).

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