Cover IMF Working Papers
Shocks to Inflation Expectations
Author:
Mr. Philip Barrett
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and
Jonathan J. Adamsnull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2022: Issue 072
Language:
English
Publication Date:
29 Apr 2022
DOI:
https://doi.org/10.5089/9798400206313.001
ISBN:
9798400206313
ISSN:
1018-5941
Pages:
52
Keywords:
Inflation; Sentiments; Expectations; Monetary Policy; inflation expectation; interest rate hike; sentiment shock; forecasted inflation; expectations multiplier; inflation impulse; Inflation; Neoclassical theory; Rational expectations; Vector autoregression; Machine learning
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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, estimating a semi-structural VAR where an expectation shock is identified as that which causes measured expectations to diverge from rationality. Using data for the United States, we find that a positive inflation expectations shock is deflationary and contractionary: inflation, output, and interest rates all fall. These results are inconsistent with the standard New Keynesian model, which predicts inflation and interest rate hikes. We discuss possible resolutions to this new puzzle.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2022: Issue 072