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Appendix A. Data Sample and Additional Results

Figure A.1:
Figure A.1:

Mean and Standard Deviation of Long-Term Inflation Forecasts—Data Availability

(Number of Countries)

Citation: IMF Working Papers 2018, 280; 10.5089/9781484388846.001.A999

Source: Consensus Economics.Note: AE = advanced economies. EM = emerging economies.
Table A.1:

Mean and Standard Deviation of Long-Term Inflation Forecasts—Data Availability

article image
Figure A.2:
Figure A.2:

Evolution of Anchoring Metrics, 1998–2017

(Three-Year-Ahead Inflation Expectations)

Citation: IMF Working Papers 2018, 280; 10.5089/9781484388846.001.A999

Source: Authors’ calculations.Note: The figures show the evolution of anchoring metrics computed over six-year rolling windows. The lines denote the medians across countries. The shaded areas denote interquartile ranges. A lower value denotes better-anchored expectations in all metrics. AE = advanced economies. EM = emerging economies.
Table A.2:

Cumulative Response of Consumer Prices—Estimation Results

article image
Source: Authors’ calculations.Notes: All regressions include 12 lags of the change in consumer prices, and country and time fixed effects. Country-based cluster-robust standard errors in parentheses. ∆ctot is reversed so that a positive change denotes a deterioration in the terms of trade. *** p <0.01, ** p <0.05, * p <0.1.
Table A.3:

Response of Consumer Price Inflation—Estimation Results

article image
Source: Authors’ calculations.Notes: All regressions include 12 lags of the change in consumer prices, and country and time fixed effects. Country-based cluster-robust standard errors in parentheses. ∆ctot is reversed so that a positive change denotes a deterioration in the terms of trade. *** p <0.01, ** p <0.05, * p <0.1.
*

The views expressed in this Working Paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the authors and are published to elicit comments and to encourage debate. We thank, without implicating, Oya Celasun, Gabriel Di Bella, Raphael Espinoza, Douglas Laxton, Gian Maria Milesi-Ferretti, Mirjana Miletic, Maury Obstfeld, Rafael Portillo, Jay Sham-baugh, and Philippe Wingender for their comments and suggestions. Jungjin Lee and Jilun Xing provided excellent research assistance.

International Monetary Fund, Research Department, rbems@imf.org.

International Monetary Fund, Research Department, fcaselli@imf.org.

§

International Monetary Fund, Research Department, fgrigoli@imf.org.

International Monetary Fund, Research Department, bgruss@imf.org.

International Monetary Fund, Research Department, wlian@imf.org.

1

Central banks can choose among a wide set of monetary frameworks, but their ability to deliver price stability is ultimately determined by their credibility (Mishkin and Savastano, 2001; Woodford, 2005).

2

We focus on long-term inflation forecasts—that is, three years ahead and beyond—reported by Consensus Economics surveys that should not reflect the effect of transitory shocks and the response of monetary policy. While alternative sources of long-term inflation forecasts exist for some countries (e.g., surveys conducted by Central Banks), the Consensus Economics database offers wider country and time coverage, and ensures consistency in the construction of surveys across countries.

3

The change in the international price of 46 commodities is weighted by the ratio of net exports of each commodity to GDP. The commodity terms of trade index provides an estimate of the changes in disposable income, relative to GDP, arising from fluctuations in commodity prices.

4

See, for instance, evidence on the variability of transparency of monetary policy within inflation targeters in Brito et al. (2018).

5

The one-year-ahead horizon in any given Consensus survey corresponds to forecasts for the current calendar year, the two-year-ahead horizon corresponds to the following calendar year, and so forth. The horizon of seven years ahead and beyond is the longest available.

6

Income classifications are according to the IMF World Economic Outlook database and as of October 2018.

Early Consensus Economics’ surveys only report mean forecasts; the dispersion of responses is only available since 2005, or even later in a few cases. Data availability on long-term inflation forecasts is summarized in Figure A.1 and Table A.1.

7

Cukierman and Meltzer (1986) argue that the ability of the monetary authority to achieve its future objectives depends on the inflation expectations of the public, which in turn depend on the public’s perception of the credibility of the monetary authority.

8

Other factors are also likely to matter for longer-term anchoring; for instance, Mishkin and Savastano (2001) point to the importance of stringent prudential regulations and strict supervision of financial institutions to ensure that the system is capable of withstanding exchange rate fluctuations.

9

The analysis uses asset prices (CDS spreads) to capture the market perception about the sustainability of public debt. Importantly, these measures incorporate not only concerns about the current level of public debt for intertemporal fiscal solvency, but also the expected path of future deficits.

10

See Argov et al. (2007) and Alichi et al. (2009) for New Keynesian monetary models where the endogenous extent of central bank credibility affects inflation expectations and the propagation of inflationary shocks.

11

Ancillary evidence available upon request shows that the results in the paper are robust to using time-invariant weights.

12

Anchoring can also be imperfect under fixed exchange rate regimes, especially if the commitment towards the regime is perceived to be weak. While that could be an interesting aspect to investigate, we focus on the effect that the credibility of monetary policy may have on inflation persistence among floats. See Alogoskoufis and Smith (1991) and Benati (2008) for evidence on persistence in fixed exchange rate arrangements.

13

Consumer prices correspond to headline consumer price indices (CPI) at monthly frequency reported by national authorities and obtained from Haver Analytics.

14

Observations with coarse classifications 1 and 2 were considered fixed exchange regimes (i.e., flex = 0). These include: no separate legal tender; pre announced peg or currency board arrangement; pre announced horizontal band that is narrower than or equal to +/-2 percent; de facto peg; pre announced crawling peg; pre announced crawling band that is narrower than or equal to +/-2 percent; de facto crawling peg; de facto crawling band that is narrower than or equal to +/-2 percent. Observations with coarse classification codes 5 (“free falling”) and 6 (“dual market in which parallel market data is missing”) were excluded. Other classifications are considered floats (i.e., flex = 1). In robustness exercises of section 3.4 we: (i) include also observations classified as “free falling” (coarse classification 5); and (ii) consider the de facto exchange rate regime classification of Shambaugh (2004).

15

Adding lags of ∆ctot does not alter the results.

16

We exclude euro area countries from the analysis since, at the individual level, they don’t have an independent monetary authority. We also exclude Venezuela, which experienced hyperinflation during the sample period, and Ukraine, where inflation dynamics towards the end of the sample were influenced by its civil war.

17

The Driscoll and Kraay (1998) procedure, that is also robust to cross-sectional dependence, is used in robustness exercises (section 3.4).

18

The estimation results for all horizons h are shown in Annex Table A.2. The estimated coefficient β6h is negative—meaning that, for floats, better-anchored inflation expectations are associated with a smaller increase of consumer prices following a negative terms-of-trade shock—for all h = 1,…, 12 and statistically significant at the 99 percent confidence level.

19

The estimation results for all horizons h are shown in Annex Table A.3.

20

By taking into account bilateral trade linkages, the nominal effective exchange rate may be able to summarize more closely the complete set of relative price adjustments that can be expected to affect consumer prices. However, if a substantial fraction of bilateral trade is invoiced in US dollars (as documented in Gopinath, 2015), the nominal exchange rate with respect to the US dollar may be a reasonable choice.

21

This result is consistent with Carriére-Swallow et al. (2016), who find that exchange rate pass-through rates are negatively related to the dispersion of inflation forecasts across individual forecasters, a proxy for the extent of anchoring of inflation expectations.

Expectations' Anchoring and Inflation Persistence
Author: Mr. Rudolfs Bems, Francesca G Caselli, Mr. Francesco Grigoli, Bertrand Gruss, and Weicheng Lian
  • View in gallery

    Mean and Standard Deviation of Long-Term Inflation Forecasts—Data Availability

    (Number of Countries)

  • View in gallery

    Evolution of Anchoring Metrics, 1998–2017

    (Three-Year-Ahead Inflation Expectations)