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© 2022 International Monetary Fund WP/22/72
IMF Working Paper
Research Department
Shocks to Inflation Expectations
Prepared by Philip Barrett and Jonathan J. Adams
Authorized for distribution by Malhar Mabar
April 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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, 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.
| JEL Classification Numbers: | D84, E31, E32, E52 |
| Keywords: | Inflation, Sentiments, Expectations, Monetary Policy |
| Author’s E-Mail Address: | pbarrett@imf.org adamsjonathan@ufl.edu |
| JEL Classification Numbers: | D84, E31, E32, E52 |
| Keywords: | Inflation, Sentiments, Expectations, Monetary Policy |
| Author’s E-Mail Address: | pbarrett@imf.org adamsjonathan@ufl.edu |
We thank Jorge Alvarez, Klaus Hellwig, Malhar Nabar, Diaa Noureldin, and Philippe Wingender for helpful comments and suggestions
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WORKING PAPERS
Shocks to Inflation Expectations
Prepared by Philip Barrett and Jonathan J. Adams