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Shocks to Inflation Expectations

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  • Jonathan J Adams

    (Department of Economics, University of Florida)

  • Philip Barrett

    (International Monetary Fund)

Abstract

The consensus among central bankers is that higher inflation expectations can drive up inflation today, requiring tighter policy. We assess this by devising a novel method for identifying shocks to inflation expectations: we run a structural VAR, where the expectation shock is the single dimension in the time series that causes forecasts to depart from those implied by rational expectations. We measure these shocks for inflation expectations, label them ``sentiment shocks", and study their effects on the macroeconomy. Using data on several measures of inflation expectations and other time series for the United States, we find that a positive sentiment shock causes output and interest rates to fall, but barely affects inflation. These results are a puzzle, incompatible with the standard New Keynesian model which predicts inflation and interest rates should increase.

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  • Jonathan J Adams & Philip Barrett, 2022. "Shocks to Inflation Expectations," Working Papers 001007, University of Florida, Department of Economics.
    • Handle: RePEc:ufl:wpaper:001007
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    2. Rodion V. Balakin & Yuliya A. Steshenko, 2024. "Review of Approaches to Assessing the Impact of New Challenges on the Economy and Certain Aspects of Taxation," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 3, pages 68-85, June.
    3. Wildauer, Rafael & Kohler, Karsten & Aboobaker, Adam & Guschanski, Alexander, 2023. "Energy price shocks, conflict inflation, and income distribution in a three-sector model," Energy Economics, Elsevier, vol. 127(PB).

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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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