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Do inflation expectations respond to monetary policy? An empirical analysis for the United Kingdom

Author

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  • Burr, Natalie

    (Bank of England)

Abstract

This paper studies how monetary policy impacts inflation expectations in the United Kingdom. Using higher moments of the distribution of inflation expectations, I construct a summary measure of expectations for households, firms, professional forecasters and financial markets. In a Bayesian VAR identified using a high frequency-identified monetary policy shock series, I find that a monetary policy tightening causes significant variation in the response of inflation expectations across groups: firms’ and financial market median expectations fall, while households’ inflation expectations rise. I document that monetary policy decisions act as a stabilisation mechanism by reducing the dispersion of expectations 12–18 months following a shock.

Suggested Citation

  • Burr, Natalie, 2025. "Do inflation expectations respond to monetary policy? An empirical analysis for the United Kingdom," Bank of England working papers 1109, Bank of England.
    • Handle: RePEc:boe:boeewp:1109
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2025/do-inflation-expectations-respond-to-monetary-policy-an-empirical-analysis-for-the-united-kingdom.pdf
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    More about this item

    Keywords

    Inflation expectations; monetary policy transmission; structural VAR;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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